Are Bank FDs indeed safer than other investments?

We have usually heard investors seeking safe investments. Invariably bank fixed deposits are presumed to be safe. On the other hand equity investing is considered risky.

If we further get deeper into the thought process we will realize that fixed deposit is considered safe because under normal circumstances we get back the same principal amount that was initially invested. However, in case of equity we may get either more or less or same amount of initial investment.

Does this mean equity is risky or for that matter is fixed deposit really safe? Answer is No. There are varieties of risks that are associated with investments. Some of the risks are market risk, credit risk, liquidity risk, reinvestment risk, political risk, economic cycles etc. Broadly there are two types of risk systematic risk and unsystematic risk.

Systematic risk is a risk, which exists in the system e.g. inflation, taxes, political situation, economic cycles etc. This form of risk affects all our investments. Our returns from all kinds of investment like equity, debt, gold, real estate etc will get reduced to the extent of inflation. Suppose rate of inflation within economy (READ: System) is 7% and returns from equity, debt, Gold and real estate are 20%, 6%, 13%, 18% then our actual returns will be 13%, -1%, 6%, 11%.

Systematic risk is usually not transparent, e.g. we cannot see impact of inflation on our investment. The principal amount invested in fixed deposit is returned back to us completely. Therefore we feel that investment in fixed deposit is safe. However inflation would have eroded our returns from fixed deposit and hence to that extend fixed deposit is subject to systematic risk.

Another form of risk is unsystematic risk. This form of risk is associated with a particular kind of investment, e.g. if we buy land and if real estate prices crash, our investment will have a negative impact, however if we invest in Gold and if housing prices crash worldwide, the crash will not affect our Gold investment. Similarly, if we have bought stocks of Reliance Industries Limited and if something happens to Bajaj family there will not be any impact on the stock of Reliance Industries Ltd. Unsystematic risk does not exist in system, it only affects a particular investment.

Similarly, in case of fixed deposits, unsystematic risks could be credit risk or reinvestment risk.

Since we do not directly see the movement of fixed deposit prices, it does not mean it is risk free. In case of equity investment, its prices fluctuate based on impact of variety of risks. In case of fixed deposit investment amount remains constant but various risks quietly erode real value of principal. Simply because we cannot see the risk does not mean risk doesn’t exist.

As an investor we should always remember the fundamental of investments and its returns. Investor gets returns on investments because he takes the risk of parting with his/her money. The moment we part with our money, our investment inherits risk.

To conclude:

By all means invest in bank fixed deposit, Govt. bonds or any other investments which will help you reach your financial goals but never ever think that your investment is risk free 100%.

For Corp Bonds contact:

sriram.adviser@gmail.com

phone no : +91-9741598945 (India) 

                   +1-408-250-9952 (USA)

Most Common Roadblocks on the Road to Building Wealth

Many Indias will never reach their dreams of building wealth, being financially secure, and being able to retire in comfort. The reason is most often a combination of these seven biggest money mistakes.

1. Having a Thirty-year Mortgage

Where do you find the money to build wealth? Try looking at your mortgage. Millions of Indians think nothing of paying for their home over 30 years, even though the average homeowner ends up paying two-and-a-half times the purchase price of the home by stretching the payments out this long. Having a 15-year mortgage instead of a 30-year mortgage can save you large sums of money and help you build wealth.


2. Giving Control of Your Money to Someone Else

If you're not involved in your day-to-day family finances, you're putting yourself at risk. If you're married and you let your spouse handle all the financial matters, you're at risk if your spouse dies or becomes seriously ill or if you divorce. Know the details of your family's finances, investments, debts, retirement savings, etc. Don't turn your investments and financial affairs over to a broker or financial consultant without keeping abreast of what is being done with your money and being involved in investment decisions. Never give total control of your money to someone else.

3 Not Controlling Spending Leaks

The reason so many people in India are in so much debt is because they dribble their money away in small, barely noticeable amounts. Like drops of water dribbling through the hole in the dike, the loss is barely noticeable, but over time the hole in the dike gets bigger and bigger. By the time the water is gushing through, the damage is done. The same is true with spending leaks. It's a lot easier to plug a small hole than to ignore the drips and look over your shoulder later and see a huge tidal wave of water coming your way in the form of unmanageable debt. If you're ever going to accumulate wealth, you must control spending leaks.

4 Not Setting Goals

If you don't know where you're headed and how you plan to get there, you'll probably never arrive. To accumulate wealth, you need a plan. To be motivated to save money, you need something specific to save for. To succeed in accumulating wealth, write your goals down and visualize them, whether they're a relaxing retirement, a mortgage-free home, or an unforgettable vacation.

5 Incurring Too Much Debt

If you're spending all your money paying interest on credit cards and installment debt, you won't have enough left for savings. When you buy on credit and don't pay the balance off at the end of the month, you end up paying much more for your purchases. A 25000/- big-screen TV can end up costing you 50000/-, but you'll never know it because the true cost is hidden in your credit card payments. Pay cash and stay away from credit card debt if you want to accumulate wealth.

6 Not Saving Enough for Retirement or Starting Too Late

When you're in your 20s and 30s, it's easy to think you have all the time in the world to accumulate wealth and save for retirement. The truth is, you'll have to save a lot less if you start now and give your earnings time to compound. If you're over 40 and you're behind on your retirement savings, you'll have to save much larger sums to ever catch up to where you should be. Start saving early, and save at least 10 to 15% of your income, and you'll be well on your way to accumulating wealth.

7 Cashing Out Retirement Funds

Half of all Indians end up cashing out their PF balances when they change jobs. Still others take out loans against their PF balances, permanently reducing the amount of earnings they would have accumulated. If you want to accumulate wealth, tax-deferred retirement plans like PF plans are a great way to do it, but resist the urge to tap those funds before retirement.

Avoid these seven money mistakes and increase your chances of successfully accumulating wealth.

Which is safe way to using Credit Card on the internet? or Officeline?

Hi All,
I am VenkataRamana, few days back when i asked one of my friend to book the flight ticket on-line he is worried about using credit card online. I would say that is because of lack of knowledge on the subject. Believe me, using Credit Card on the Internet is safer than using it offline!

What happens when you are buying online?

# You will be entering your credit card information on your computer

# The information is transmitted through telephone line to the credit card payment gateway server

# The gateway server verifies and approves your credit card and withdraws money from your account and credits to the seller

# On successful payment, the gateway server directs you (the browser) to the product download page or order acceptance page

Here you can see, when you enter the credit card information, it goes directly to your credit card server and not the merchant.

The security issue here is, a hacker can hijack the data entered on your computer. But since the data is encrypted using 128 bit SSL code before it is transmitted, the hacker cannot get your credit card details.

If you can't understand what is 128 bits encryption, please read the first article listed below. It has been clearly explained in the laymen's language.

The possiblities of losing your credit card information to hackers:

1) By reaching a wrong website and entering your credit card data on a non-secured server.

For example, if you know http://www.ebay.in/ is a reliable website, and the hackers also know that. So they will launch a website like http://www.ebays.in/ or http://www.ebuy.in/ Usually such minute variations go unnoticed.

Thinking that you are paying to ebay, you will be entering the credit card details at a hacker's site. They simply store the information and misuse it later.

Secondly, the hackers pose as if they are the credit card company (or bank) and email you asking the details. You should keep in mind that no genuine company will ask for such details through email or phone.

The most dangerous places to use your credit card are Porn Sites and Gambling Sites. If you are serious about business, never ever visit such sites. Usually these are the sites where viruses and spyware software originate from (though there are few legal sites avialable, we cannot differentiate).

Don't borrow on your credit card! click to know why

2) Through a spyware (virus) on your computer.

There are many viruses that register your keyboard strokes (whatever you type) and keep sending the details to hackers.

To prevent such spywares, there are lots of utilities available today free-of-cost. You can try installing Yahoo tool bar which includes anti-spyware. I believe Microsoft also offers with free anti-spyware software.

In addition to freeware, it is recommended to have a reliable anti-virus package loaded on your computer.

If you have taken care of the above two reasons, you need not worry about using credit cards online. I am not telling you to blindly listen to me. Just visit the links provided at the end of this article and study for yourself.

What happens when you are paying at a hotel?

# You give your credit card to the waiter

# The waiter takes it to the person at cash counter

# The cashier swipes your card on the swiping machine

# The swiping machine transmits the data through telephone line to the credit card server

# The server verifies and approves your credit card and withdraws money from your account and prints the receipt

# The cashier hands over your credit card along with receipt to the waiter

# The waiter brings it back to you and you acknowledge the receipt

Let me ask you one simple question:
What if the waiter or the cashier writes down your name, credit card number, date of expiry and the 3 digit security code (behind the card) and misuses for his/her own benefit or pleasure. He/she could even use it on the Internet, can you control that?

I hope you understand that using credit card online is safer than offline.

Another information, whenever any transaction occurs online, the ip address of the computer (from where it is transacted) is registered (these days even a normal membership sites use this technology). It is very easy to catch the thief using the ip address.

Secondly, in 2001 the first cyber police station was inaugurated in India. Today we have many police stations functioning for cyber crime. Please check this link to know about cyber law and this link about cyber police stations for more information.

Now you can think your self about the way in which you can use your credit card safely, please write you comments about this...

The rupee rise: How you are affected?

Reserve Bank of India, the nation's central bank, has had a tough first six months at office -- first to keep inflation under check and then to delicately address the runaway rise of the Indian rupee (against the dollar).

A series of measures linked to curbing credit growth and lowering short-term interest rates twice this year, have pegged inflation to 4.27 per cent for the week ending July 4 from a two-year high of 6.73 per cent in January-end. Currently, India's inflation is within the medium-term range set by the RBI.

A variety of factors are, however, keeping the rupee firm against the dollar, which has risen by nearly 10 per cent between January-July this year. The rupee stands at a near-decade high of 40.3 against the dollar, from 44.2 when the year began.

Rupee appreciation has been the sharpest in three decades in the April-June quarter this year. And analysts expect the rupee to gain further.

The impact of a rupee rise

As the rupee rises against the dollar (or conversely the dollar weakens) Indian exports firms earn less and thus begin to lose their competitive edge -- whether it be textile, jewellery, software, drugs or automobiles.

India's 'big four' in the software pack -- Infosys, TCS, Wipro and Satyam have already seen their net income in the first quarter ending June, fall due to the sharp rupee rise. This is because India's software companies bill several clients in dollar terms.

A weak dollar thus hits currency-linked earnings.

The impact is seen through:

* Lower exports, as exporters are unable to maintain necessary profit margins if their dollar-linked earnings fall. Analysts now predict that India's export target of $160 billion may not be met. A more 'realistic' export target for this year has been pegged at $135-140 billion.
* If the rupee continues to gain against the dollar, India's competitive strength in world trade (which is already negligible) will weaken. This, in turn, shrinks new job avenues.
* Exporters are keener to sell their product/services locally, if possible. This would increase local supplies and lower prices and inflation.

Export lobby groups and trade analysts are now urging the government to act to curb the rupee's rise. The equation is simple. In a competitive business environment where operating margins will determine survival, export houses are in a fix.

FIEO calls for government intervention, government gives relief

The Federation of Indian Export Organisations, in an official statement this month, said that the profitability of exporters in executing existing contracts has been reduced substantially. In certain sectors exports are being executed at loss to honour the contract and maintain the market presence.

"The competitiveness of our exports is eroded and we are losing orders to our competitors like China, Thailand, Pakistan, Sri Lanka, Bangladesh, Vietnam and Indonesia," the statement read.

Last week, the government announced a much-awaited $345 million relief package for exporters. This includes increasing duty drawback rates on most existing export items eligible for this concession, increasing the list of export items eligible for duty drawback, and banks offering shipment credit on easier terms for small and large exporters.

Overseas fund flows key factor

India's economic growth story remains intact, with growth expected to sustain at around the 9 per cent mark for 2007-08. With the outlook global equities and emerging markets improving, India's stock markets are expected to remain robust due to strong liquidity and confidence of positive quarterly earnings going ahead.

The benchmark 30-share Sensex stood at a record close of 15,794.92 on Tuesday, up 14.5 per cent this year, led by strong overseas fund flows.

Overseas fund have so far invested $9.9 billion worth into Indian equities in 2007, well above last year's level of $7.99 billion. Foreign direct investment rose to $17.7 billion in 2006-07 from $7.7 billion a year earlier.

As buyers, overseas funds convert dollars and buy rupees to invest into Indian companies. This will keep the demand for the rupee up.

What the RBI says

Well, in this case, not much. The RBI has said that the rupee will continue to find its true value based on pure market dynamics. The bank has officially declined to comment on any intervention to curb the rupee surge, but traders said that in recent weeks the RBI is widely believed to have bought dollars to prevent the rupee from rising beyond 40.30 levels.

A theory doing the rounds is that if the RBI intervenes to stop the rupee from appreciating further, it may increase the profitability of export-oriented units and create more jobs, which in turn could increase the inflationary tendency in the market.

But jobs may be lost

However, on the other hand, if the rupee keeps strengthening, a lot many people may actually lose jobs. Exporters are also considering layoffs, which may eventually affect 275,000 jobs by the year-end.

Yet another fallout of the rupee rise is the proposal by the IT and BPO companies in India which plan to increase the working hours of their employees and doing away with a 5-day week and making them work on Saturdays too.

According to a study by the Union commerce ministry, the worst hit sectors are infotech, textile, leather, handicrafts, marine products, engineering, sports goods, toys and agri products.

Analysts predict firm Rupee trend going ahead

Most analysts predict a firm trend for the rupee going ahead. Local brokerage firm Ambit Capital has revised its assumptions for the rupee-dollar to 40.58 for FY 2008 (estimates), 40 for FY09(E) and 39 for FY2010(E).

However, a stronger rupee will benefit importers such as the oil marketing companies and airlines. While exporters like software, textiles, drugs and auto components will be adversely impacted by the stronger rupee, for global cyclicals, lower prices of landed imports will create downward pressure on local prices, the brokerage told its clients, in a latest note.

According to the equity research outfit of French Bank Credit Lyonnais, companies like Hindalco, Wipro, Infosys and Tata Steel will be negatively impacted by currency appreciation. Earnings of textile and hotel companies will also see downward revision in earnings due to strengthening of rupee, it said.

How will the Rupee surge impact you?

With factors suggesting that the rupee could rise, we could see a scenario of an increasing percentage of goods and services being offered locally, which would lead to lower prices and hence curb inflation further.

Industries, where domestic prices are linked to the cost of imported raw material -- like metals, have and will lead to further lowering of input cost of imported aluminium and copper. A reduction in the domestic prices is expected. Obviously, importing price-sensitive electronics and gadgets would also be cheaper, as would other retail items.

An appreciating rupee shows the strength of the economy, which can be seen when one travels overseas, if you try to convert what the dollar is worth. So maybe you should plan your overseas trip now, if you have enough disposable income.

You obviously have concerns if you are an exporter or work in an export-house. Another groups of people who may not be happy to see the rupee rising, would be those who hold dollar-denominated accounts.

5 things to know about fixed deposits

With interest rates rising over the last one year, fixed deposits have become popular again.

But there are certain things that you should know about fixed deposits before they go around investing in them. Here are five must-knows about fixed deposits:

1. Interest paid either monthly or quarterly

The interest on a fixed deposit is usually paid out either monthly or quarterly depending on the option that the investor chooses. So an individual investing Rs 1.5 lakh (Rs 150,000) in a one-year fixed deposit paying an interest of 8% per annum will get Rs 1,000 per month (8% of Rs 1.5 lakh divided by 12; or Rs 3,000 per quarter (8% of Rs 1.5 lakh divided by 4).

Other than this, those depositing money in a fixed deposit also have the reinvestment of interest option available.

2. The yield or return on a fixed deposit is different from interest.

An interest of 8% in a year would mean a return of 8.24% in a year for those individuals who opt for the reinvestment of interest option.

What this means is that Rs 100 invested at the beginning of the year will amount to Rs 108.24 by the end of the year. This is because the interest earned is compounded every quarter.

An interest of 8% in a year would imply an interest of 2% in a quarter. Hence Rs 100 invested by an individual would earn an interest of Rs 2 (2% of Rs 100) at the end of three months. So the Rs 100 investment made by an individual would have amounted to Rs 102 by the end of three months (Rs 100 + 2% of Rs 100). Since this interest is reinvested, the individual earns 2% interest on Rs 102 for the next three months. The interest earned for the next three months is Rs 2.04. This interest is also reinvested and the individual earns an interest of 2% on Rs 104.04 for the next three months.

Repeating this process at the end of the year, the individual has accumulated Rs 108.24 and hence a return of 8.24%, which is higher than the interest of 8%.Given this individuals putting money in a fixed deposit who do not need a regular income from the fixed deposit, it makes more sense for them to opt for the reinvestment of interest option and earn a greater return.

3. Want to break a fixed deposit? Careful

At times it might become necessary to break the fixed deposit either because the money is immediately required or for the fact that other banks have started offering a higher rate of interest on the deposit.

Breaking a fixed deposit has a cost attached to it. Most banks, on premature withdrawal, give an interest which is 0.5% lower than the interest applicable for the period for which the deposit has remained with the bank.

Let's try and understand this through an example. An individual makes a three-year deposit, paying an interest of 9% per annum. Due to urgent need of money he may have to break the deposit at the end of one year. The bank for a period of one year pays an interest of 8.5%. The individual will be paid an interest of 0.5% less than 8.5% which is 8%.

4. The interest earned on a fixed deposit is not tax free

The interest earned from a fixed deposit gets added on to the income for the given year and is taxed according to the tax bracket that an individual falls into. Hence, for those falling in the top tax bracket the interest earned from a fixed deposit is taxed at the rate of 33.99%.

5. It is possible to take loans against fixed deposits

This works out to be cheaper and involves less paper work vis a vis taking a personal loan.

By -- Chandnee Sinha

They built billion-dollar empires from scratch

While inheriting a billion dollars is still the easiest way to land on our list of the world's wealthiest, it certainly isn't the most common. Almost two-thirds of the world's 946 billionaires made their fortunes from scratch, relying on grit and determination, and not good genes.

Fifty of these self-made tycoons are college or high school dropouts. The most famous billionaire dropout is Microsoft's Bill Gates, who finally got his honorary degree from Harvard University in June, 30 years after quitting the prestigious school to sell software. ''I did the best of everyone who failed,'' joked the world's richest man in his official graduation address. With failure like that, who needs success?

Other billionaires, such as media maven Oprah Winfrey, made their fortunes against far greater odds. Born in rural Mississippi, she spent her early years living in poverty on her grandmother's farm. Wanting a way out, she moved to Wisconsin to be with her mother, but was sexually molested by her male relatives. At age 14, she reportedly gave birth to a premature baby who died. Only after moving to Nashville to be with her father did her luck finally start to turn.

In honor of the world's self-made billionaires, we're recounting 10 of our favorite real-life Horatio Alger tales.

The stories of these bootstrapping billionaires are as diverse as the 10 individuals themselves. They range in age from 40 to 91, hail from diverse industries such as fashion and oil, and live in five different countries. Russia's richest man, Roman Abramovich, was an orphan. Apple's iconic Steve Jobs was adopted. Jobs dropped out of Reed College when he couldn't pay the tuition; his net worth today could support nearly 40,000 students at Reed for four years. Three others, including Ralph Lauren, are also college dropouts.

Another five are high school or grade school dropouts, proving that street smarts can often trump book smarts. The U.K.'s publishing magnate Richard Desmond, for instance, quit high school when he realised he could make more money working in the cloakroom of a club; at age 16, he borrowed his older brother's suit to get a sales job. He's been selling ever since, peddling music, porn and celebrity titles including OK! magazine.

Asia's richest man, Li Ka-shing dropped out of school at age 15, after his father died, to work in a factory. Kirk Kerkorian quit during the eighth grade to take up boxing. He later flew airplanes on daredevil missions across the Atlantic during World War II, before sinking his money into his own airline and reinvesting profits in Las Vegas.

Sin City has also been good to Sheldon Adelson. The son of a Boston cabdriver borrowed $200 at age 12 to start selling newspapers; he later held stints as a mortgage broker, investment advisor and financial consultant. The high school dropout and Broadway enthusiast studied voice in his teens, but it was another kind of stage that called him--trade shows, where he made his first fortune.

Adelson later gambled on casinos in Las Vegas, Macau and Singapore, and took his Las Vegas Sands public in December 2004. Says Adelson, ''I loved being the outsider.''

Good luck and good timing is also helpful when creating vast fortunes from scratch. James Cayne, for instance, moved to New York to play bridge full-time; he was spotted by Wall Street legend Alan "Ace" Greenberg, who was impressed by Cayne's card skills and hired him to be a stockbroker at his firm Bear Stearns. Cayne is now chairman.

The world's wealthiest novelist, J.K. Rowling, was on welfare raising her little girl when her agent called to tell her that Bloomsbury would publish her book about an adolescent wizard named Harry Potter.

One thing is for sure: There is no lack of chutzpah among our rags to riches bunch.

5 steps to become a smart investor

With a wide variety of investment opportunities on offer, investors are often left wondering where they should invest their money. And the fact that a large number of money magazines, websites and investment advisors are offering advice on what one must do with money isn’t making investors’ cause any easier. At Personalfn, we believe that investing, at its core is a rather simple activity. If investors stick to the basics, they are likely to do well for themselves over longer time frames. In this article, we present a 5-step strategy, adhering to which can help transform investors into “smart” investors.

1. Have an investment objective in place
All individuals have unique sets of needs like providing for children’s education/marriage, buying a car/house or traveling abroad, among others. Individuals must prioritise their goals and develop portfolios dedicated for achieving the same. Investing in an ad hoc manner could mean that investors fail to achieve their stated objectives. For example, if building a corpus to go on a holiday is a priority, then make an investment plan to achieve the same and invest in line with the plan in a disciplined manner.

2. Recognise the risk profile and adhere to it
Investors should be unambiguously aware of their risk profile while getting invested. And making investments in line with the same is vital at times. Broadly speaking the ability to take on risk reduces as one ages. Having said that, it should be understood that each individual has a unique risk profile and recognising the same should be the first step. For example, two individuals with similar age profiles, but with disparate risk profiles is not an uncommon scenario. Investors need to invest in investment avenues in line with their ability to take on risk. Hence, a risk-taking investor is likely to invest mainly in instruments like equities and equity funds. On the other hand, risk-averse investors should hold a portfolio dominated by assured return instruments like fixed deposits and small savings schemes.

3. Don’t ignore asset allocation
Asset allocation is a crucial exercise to follow while investing. Investing a large portion of the portfolio in the same asset class can prove to be a risky proposition. Diversifying your investments across asset classes like equities, fixed income instruments, gold and real estate among others is important. A well-diversified portfolio helps investors spread their risk across various assets so that volatility in any one asset does not put the entire portfolio at risk because of investments in other assets.

4. Track your investments
Making investments to achieve one’s investment objective does not bring an end to the investment process. Investing is an ongoing process; investors need to continuously monitor the performance of their investments. This will ensure that they are updated with respect to their portfolios. It also gives them an opportunity to make necessary alterations to their portfolio in case some investments have failed to deliver.

5. Select the right investment advisor
Every investment avenue needs to be well-researched before making an investment. But, there are only a few investors who actually research the avenues they wish to invest in; this is mainly because they either don’t have the time or the expertise to do so. Investors would do well to associate themselves with a competent investment advisor who can assist them build a portfolio in line with their investment objectives and risk appetites. The main criterion for selecting an investment advisor should be his ability to offer quality, unbiased advice. Also ensure that he is equipped to provide post-investment services. To establish all these points, it is advisable to go for an investment advisor on reference.

Fixed or floating home loans: which is better?

Home loan rates are rising once again. And you are confused if floating or fixed home loan rates are best suited for you.

Will you pay more if you have opted for a fixed home loan rate? What is the difference between the two?

How do you switch from a fixed to a floating home loan rate regime? Is it beneficial in the first place?

Home loan expert Harsh Roongta answered these and other home loan related queries in a chat with Get Ahead readers on February 13.

For those of you who missed the chat, here is the transcript.

yhusein asked, Hi, I am planning to buy a house for myself on home loan. Do home loans include stamp duty, registration, and service tax costs in addition to the value of the flat?

Harsh Roongta answers, Yes. Infact most banks will include the cost of stamp duty, registration and service tax costs as well as things like State Electricty Board deposits, etc.

Akash asked, Hello. Though this may not be exactly your area of expertise, but I would want your feel on whether this is the right time to buy a house? My concern is more from the real-estate value whether it will increase or decrease and secondly whether the home loan rates will increase or decrease moving ahead? Pls advise. Thanks!

Harsh Roongta answers, At Apnaloan.com we have always advised our clients that they should avoid trying to time the market when the property is being bought for your own residence. That advise still holds good though given the current scenario you could possibly wait for around 3 -4 months to see if the much awaited property price correction actually happens.

RaviKumar asked, Hi. Recently I have taken a housing loan from LIC to buy a 3-bed room flat which is under construction and is expected to be completed by Sept '07. LIC released part of the total sanctioned amount as the flat is under construction. Balance amount will be released in other two phases. Now I submitted the loan amount papers in my office to claim tax benefits for home loan. But I came to know that tax exemption could be claimed only on the principal amount and not on the interest amount. Is it so??? If that is the reason from when I can get full tax benefits. Please explain. Thanks.

Harsh Roongta answers, I'm very sorry to disappoint you but no tax benefits (neither principal nor interest) will be available for the year ended March 31, 2007 since the construction is not complete. For a more comprehensive answer please check the detailed in this regard at http://www.apnaloan.com/.

Ram asked, Given the frequent interest rate fluctuation, which one would you advise for a person who would be going for a Home Loan, is it the Fixed Rate or the Floating Rate?

Harsh Roongta answers, This is one question that bothers all buyers. Fixed gives a sense of security... while you wonder am I paying too much all the time. Our recommendation on this million-dollar question is given below.

Firstly this is not a one-time decision and needs to be reviewed periodically. Secondly understand what exactly "Fixed rate" and "Floating rate" mean before you take a decision.

Fixed Interest Rate loans: These loans are normally priced higher than a variable rate loan for a similar tenure. That is, in the present market scenario while you would be able to get a floating rate loan for 20 years at 9.5 per cent interest rate, the fixed rate would be somewhere around 10.5 to 11 per cent.

The other option is variable/floating rate loans. This kind of loan is also called 'adjustable rate' home loans. Here, the interest rate is linked to a benchmark rate. Some banks use their 'prime lending rate' (PLR) as the benchmark rate. Some banks have a specific benchmark rate that they use for home loan purposes.

Typically, the interest rate applicable to your loan tends to be a certain percentage below this benchmark rate and ideally the benchmark rate should vary exactly as per the market conditions (though it rarely does � it is quick to go up but rarely shows the same alacrity while going down).

Apnaloan.com's recommendation is to go in for a transparent floating rate in today context (this answer is given in February 2007).

Vikas asked, Hi Harsh, I have recently bought a property in Navimumbai. The builder has informed me that there is a service tax applicable on the sale of new flat (4.04% of agreement value). He also informed that the matter is subjudice and I need to give him a Bank Guarantee for the amount of service tax. Please tell whether such tax is applicable as I have already paid the stamp duty and registration. Are banks giving guarantee like the one asked for?

Harsh Roongta answers, Please ask your builder to provide his service tax registration number if you have been asked to pay anything on account of service tax.

The applicability of service tax on construction contracts is disputed but is not likely to materialise. The bank guarantee sounds like a better option though the problem is that you will have to cough up the whole amount as security for bank to provide the bank guarantee to the developer. The only benefit is that you will earn interest on the same.

sanu asked, With an income of Rs 3 lakh, can a person have his/her Flat in Navi Mumbai? Will it be possible? The increasing interest rates are also creating problems for buyers. Can you help us in this regard?

Harsh Roongta answers, As a rule of the thumb you will get about 3.5 to 4 times your annual gross income as a 20 year loan. Hence you will be eligible for a loan of around Rs 11-13 lakh.

hitesh asked, Hello sir, I am planning to purchase a flat before March '07 @ Rs 25 lakh. Pls let me know which bank will be suitable for me to take the loan & what will be the interest rate?

Harsh Roongta answers, The only answer to that question is that you will have to ask around and find out which bank is best suited for your profile and your needs. Contrary to popular opinion the lending banks do not have a menu card of interest rates which is available to every borrower. The rates, the loan eligibility and the other terms and conditions vary based on who you are and what your need is.

v_gate asked, Hi have taken fixed rate home loan at 7.25% for 10 years, some 1.5 years back. What I have read recently is floating rate is better than fixed rate. Can you please let me know if I should switch to floating rate?

Harsh Roongta answers, Sir you are in paradise already. Why should you want to shift. :-) :-) A fixed rate of 7.25% means you have tied in at what perhaps was the lowest fixed rate ever. So stay put and enjoy the fruits of your correct decision made earlier.

hy asked, Hello sir, I am staying in rented house at Mumbai. My residence is in Mumbai but far away from my office both are in Mumbai. I have a loan against my residence. Can I claim HRA & housing interest or both? Please answer.

Harsh Roongta answers, Contrary to popular opinion, there is no restriction under the I-T Act to get both. Many salaried consumers take a home loan to acquire a residential property, but do not stay in that property for various reasons. They stay in rented premises for which they pay rent. If they are receiving a house rent allowance from their employer, a question frequently arises is- whether they can claim exemption of their HRA based on the rent actually paid by them as well as the interest payable on the loan taken to acquire the owned property.

This is such a widespread question that it rightly justifies an elaborate reply justifying that both deductions are available.

LoanSeeker asked, Do I get tax Exemption if I take a loan against property for construction of my house?

Harsh Roongta answers, Tax benefits are available on repayment of a loan (by whatever name called) which is taken to acquire or construct a house property. It is not at all necessary that the property that is acquired/constructed should be pledged to avail of the tax benefits. In fact even an unsecured personal loan is eligible for the tax benefits as long as it can be proved that the loan was used for acquisition/construction of the house property.

chetan asked, Hi. I have a home loan going with ICICI Bank for Rs 9.70 lakh. If I want to do a balance transfer which bank do you suggest?

Harsh Roongta answers, Assuming you have a good track record of payment for a sufficiently long period of time you should be able to get good offerings from any bank. However existing interest rates are very close to what you are paying and you will also need to pay a pre-payment charge to your existing lender as well as a fee to your new lender. So evaluate carefully before making a switch.

BKS asked, Hi HR..... I have taken 2 houses on home loan & availing the income tax benefits. If I would take a 3rd home, is it possible to get income tax benefits? Plz clarify.

Harsh Roongta answers, Contrary to popular opinion there is no overall restriction of Rs 1, 50,000 on the interest payable on a loan taken to acquire/construct a house property or in respect of more than one property. In fact, this deduction is available for any number of properties and is without any limit under specific circumstances.

The calculation of income from house property (which means the rent you earn) has to be done separately for each property owned by a person and the home loan repayments are eligible for deduction for each such property. The deduction for interest payable on a loan taken to buy/construct house property (ies) (if you have more than 1) is not subject to any overall limit.

As explained earlier, the limit of Rs 1, 50, 000 is applicable only while calculating the income from one self-occupied property.

Iyer asked, Hello Mr. Roongta: I think Housing Finance institutions have decided to make a killing on the hapless public who have no option but to cough up the exorbitant rates charges by them from time to time. EMI on repayment of a lakh of loan has gone up from Rs 800 to Rs 1100 in a matter of a couple of years! I What do you say?

Harsh Roongta answers, I can understand your anger but you are probably directing it wrongly this time. To give you an analogy when the local shop raises the price of milk do you blame him or the general rise in prices. As far as banks are concerned you are aware of the increase in deposit rates which to a large extent is responsible for the increase in interest rates.

Perhaps the one thing on which the banks can be faulted is the complete lack of transparency in determining the increase/decrease in floating rates. It would probably start happening now.

Amit asked, Sir, I'm age 31, take home salary is Rs 45K per month, at present servicing a home loan of Rs 10 lack by paying an installment of Rs 10K., monthly expenses of Rs 25K. My questions are 1) Is this a right time to sell your old house and buy a new house? 2) My Salary is able to serve additional housing loan if any? and how much? Thanks.

Harsh Roongta answers, You should be able to get a sanction for about Rs 20 lakh loan minus your existing loan of Rs 10 lakh which means you should be eligible for a loan of about Rs 10 lakh.

chandu asked, I have two home loans. Can I avail tax benefit on both the loans?

Harsh Roongta answers, Contrary to popular opinion there is no overall restriction of Rs 1, 50,000 on the interest payable on a loan taken to acquire/construct a house property or in respect of more than one property. In fact, this deduction is available for any number of properties and is without any limit under specific circumstances.

The calculation of income from house property (which means the rent you earn) has to be done separately for each property owned by a person and the home loan repayments are eligible for deduction for each such property. The deduction for interest payable on a loan taken to buy/construct house property (ies) (if you have more than 1) is not subject to any overall limit. As explained earlier, the limit of Rs 1, 50, 000 is applicable only while calculating the income from one self-occupied property.

Palanisamy asked, Dear Mr.Harsh, I have taken partial disbursement of my home loan without any Pre-EMI. I am paying only EMI. Construction will get completed in June 2007. Can I claim the interest and principal (Rs 35,000 each) components for IT exemption for financial year 2006-07?

Harsh Roongta answers, There is a misconception that you can get tax deductions by paying EMIs instead of pre-EMI during the construction period. This is simply not true. It does not matter whether you pay EMI or pre-EMI. For the year ended march 31, 2007 you will not be eligible for any tax benefits at all as the property will remain under construction as on march 31, 2007.

Private banks hike service charges

The party is over. Banks once chased you with cheap home loans, free credit card offers, zero ATM fees, free cheque leaves, and zero-balance accounts. They are now yanking off the welcome mats. If higher home loan interest rates are already beginning to bite, the hike in service charges is bound to sting.

Private banks are taking the lead by raising all kinds of charges. Can’t maintain an average quarterly balance (AQB) of Rs 5,000?

Beginning July 1, ICICI Bank will hit you with a charge of Rs 750 for every quarter that you fail to maintain the level. Senior citizens won’t be spared either; they will be hit with a smaller club: Rs 250 per quarter. There is more.

As long as AQBs remain below Rs 5,000, you will be billed Rs 50 at ATMs after five free transactions in a quarter. Without the minimum balance, even if you want to deposit cash at your branch, you will be billed Rs 60 each time after three free transactions.

UTI Bank will deduct Rs 350 for every returned cheque after May 1, and as much as Rs 750 if you make it a habit. After three returned cheques, you pay Rs 750 from the fourth onwards. So make sure you don’t get your dates or figures wrong on the cheque. UTI’s charges for non-maintenance of average quarterly balances are similar to ICICI Bank’s.

Your own money is now going to cost you a pretty penny if you withdraw it from ATMs that don’t belong to your bank. ICICI Bank will charge Rs 20 for cash withdrawals if the ATM happens to be run by a partner bank. If not, the charge rises to Rs 60.

For the time being, ICICI and UTI are the only banks that are raising charges, but others are waiting and watching. Centurion Bank of Punjab “will decide after looking at the reaction to ICICI bank’s hike,” said Harpreet Singh, Centurion’s business director for wealth management, distribution, and loans.

Public-sector banks are not yet ready to take the plunge but may do so later. The State Bank of India, the country’s largest, has no plan to raise rates “as of now”, according to Mahoora Ali, chief general manager.

“We have not yet raised rates but I can’t tell you about our future plans,” said Ajay Kumar, general manager, retail, Bank of Baroda. HDFC Bank’s executive vice-president Chitra Pandya said the bank has not raised rates. Any future changes will be implemented only after a month’s notice.

UTI Bank vice-president Anandya Mitra defended the bank’s decision to raise various charges.

“Costs are high and there is competition,” he said. “We expect customers to maintain certain balances in line with our service levels. Also, we have seen that some people misuse their savings bank accounts for current account purposes when there are no limits to transactions. We can’t tell these people to close their accounts, but we can charge them.”

ICICI Bank spokesman Charudatta Deshpande described the increase in service charges as routine: “It is an annual feature and in line with charges in the industry. The charges are for mismanagement of balances, which increases our costs and (leads to) misuse of our systems.”

Analysts see the banks’ move as an attempt to recover losses on interest margins caused by rising interest rates. Most banks have had to raise deposit rates steeply to increase resources for lending, but loan rates have gone up less steeply.

“ICICI Bank has been aggressively raising rates - interest rates and now service charges - to maintain its earnings growth in the face of a slowdown in retail banking,” said a representative of Brics Securities, a brokerage house. “We perceive the current move as one more step in that direction.”

Robin Roy, principal consultant at PricewaterhouseCoopers, said banks are trying to add to their revenue through alternative ways. “The (deposit) interest cost is increasing,” Roy said.

Don't borrow on your credit card! Here's why

Are you applying for a credit card or personal loan? Do you know the procedure for doing so?

What are the rates at which you can borrow on your credit cards? Why are credit card interest rates very high?

What is a 'cash back' offer? Is there anything such as a 'free for lifetime' credit card?

Get Ahead Money expert Harsh Roongta answered credit card and personal loan related queries in a chat with Get Ahead readers on March 27.

For those of you who missed the chat, here is the transcript.

Shashikanth asked, Recently many banks are offering life time free credit cards. How far are they true ?

Harsh Roongta answers, I did not exactly understand the question but if it means whether any joining fee or annual fee is not chargeable on this card ever, then the answer is yes. However, interest will be payable if the full amount due is not paid and regular fees such as cash withdrawal fee and late payment fee, etc, are also payable.

Kuljit asked, Hi, Which is the better CC in which I can pay back in longer time duration with minimal interest on the amount?
Harsh Roongta answers, Credit cards are not a great vehicle to borrow and interest costs are fairly high. If at all you want an unsecured loan, you should go for unsecured personal loans. In fact, if you can possibly give security such as financial assets (life insurance policies with good surrender values, savings certificates, mutual fund units, bonds, jewellery, etc), you will get the cheapest loans.

yajnas asked, Hi I am sanjay, which loan should I opt personal loan or loan on existing credit card, in which one I will get lower interest rate?

Harsh Roongta answers, If you have a good repayment track record on your existing credit card and also have good provable income papers, then personal loans will definitely be cheaper. Even otherwise, personal loans will normally be cheaper than a loan facility provided on a credit card.

ajey asked, i have some deposits maturing in july. for the interim period is it a good idea to get balance transfer and loan on my credit card?

Harsh Roongta answers, For borrowings for very short periods such as your need, credit cards may be the most convenient mode to borrow since you can pay back the loan at any time without incurring any prepayment charges. But before you consider borrowing on your credit card, please check out the option of raising an overdraft facility against financial assets

Raghu asked, Hi, Please explain the limitations of ICICI Personal loans. Let me know the alternate bank that is offering the personal loans with BEST guidelines/terms & conditions. Thank you.

Harsh Roongta answers, There is no such thing as one single 'best loan' or the 'best bank' for a loan. If that was true, all other banks and all other loans would stop doing business. Depending on who you are and what your needs are, you will need to look around for the best possible loan.

Maruthi asked, Is there any guidelines by RBI to Credit Card Companies about the processing charges that will be charged by Banks for services like Balance Transfer, EMI etc..?

Harsh Roongta answers, Not that I am aware of.

mohan asked, I need to take a personal loan in May I know what are the interest rates ?

Harsh Roongta answers, This is a myth that all banks have interest rate charts of their personal loan rates. The interest rates for a personal loan vary widely between 12% to as high as 55%. It all depends on your income profile, your employment profile, your qualifications, your existing track record of repayment and existing borrowings, etc. The best possible way to find the rate applicable to you is to look around among various banks and get them to compete for your loan.

sameer asked, Hello sir, Is there any problem if i pay my credit card bills by cash over the counter? My monthly salary is 13k. Is the bank liable to give receipt if i pay by cheque by dropping the same in the drop box?

Harsh Roongta answers, RBI has clearly directed that banks will need to compulsorily give stamped acknowledgements if the consumer does not wish to use the drop box facility and wishes to deposit/ make payment across the counter.

Debajit asked, Hello Mr.Harsh Roongta, is it an intelligent choice to go for CC or personal loan keeping in mind its high interest rates comparing with inflation, home loan rates, own bank fixed deposits? Secondly, is there anyway a credit card user can see his credit rating in India? Thank you in advance.

Harsh Roongta answers, Credit cards are not a good instrument to borrow money. Detailed reasons have already been given in response to an earlier question.

As far as consumer access to his credit rating is concerned, currently the consumer has no access to credit bureau records. However as per the draft rules bought out by RBI in April 2006 consumers will be allowed to get access to their credit bureau records. You will have to wait for the RBI to come out with the final rules.

loanoloanoloanmela asked, credid card ...when the banks say the exorbitant interest is for the loan being UNSECURED...why don't they reduce the interest as and when they receive the payments promptly? Are they charging huge rate to good customers in order to compensate for bad and delinquent customers ?

Harsh Roongta answers, The increased interest rate is not just for its unsecured nature. It is also for its flexibility -- you can borrow and repay at any time -- as well as convenience. You are right. Today, good consumers are paying for the bad ones. The emergence of credit bureaus will allow this cross subsidisation to stop.

d_nagori asked, You are not answering me Harsh, I have asked number of times - Pls tell me whether HDFC Titanium credit card is good?

Harsh Roongta answers, I don't think this forum is good for passing judgements on specific products of specific banks. Please use the credit card comparator on our site for taking your own desicion.

ashishanuda asked, harsh, ICICI has offered me 18% interest on revloving credit on gold card is it feasible??

Harsh Roongta answers, Possible. But please remember there will be service tax on that interest, making the actual cost work out to more than 20% (after adding 12.24% soon to be increased to 12.36%) after the charging of service tax.

Srath123@rediffmail.com asked, I want to apply for the credit cards.Would you please let me know what are the procedure?

Harsh Roongta answers, Just go on your chosen bank's website and apply.

Senthil asked, Hi Harsh, What is meant by the CASH BACK offer? how is it helpful and which bank is better in this regard?

Harsh Roongta answers, CASH BACK means that banks credit a specified percentage of your spends (normally 1%) made in specified categories.

Should you prepay that costly personal loan?

Confused as to why you pay interest even after paying the minimum amount due on your credit card?

On the other hand, do you think that the personal loan you have taken charges a very high rate of interest? Do you want to prepay this loan? What are the penalties for doing so?

Is it possible to keep on transfering balance amount on your credit card indefinitely?

Get Ahead Money expert Harsh Roongta answered credit card and personal loan related queries in a chat with Get Ahead readers on March 27.

For those of you who missed the chat, here is the transcript.

aravind asked, I have taken a personal loan from Citi Finance for Rs 200,000 but interest rate is going to 22% want to close tell me the way?

Harsh Roongta answers, Normally, personal loans are made on fixed rate of interest. So the interest rate must have been 22% right from the beginning. I am afraid you will have to pay stiff pre-payment charges if you decide to pre-pay your loan. But, if you have surplus funds, this make still make sense.

loanoloanoloanmela asked, Thanks Mr.Harsh...another important question. Say I have purchased goods for Rs 20,000 using Credit Card. If I use revolving credit, I need to pay Rs 1,000 as min amt due. For, rest Rs 19,000, bank charges interest. But, what I learn now from ICICI is, even if you pay Rs 11,000, the bank still charges interest for Rs 19,000 and not unpaid balance of Rs 9,000. (I have personally experienced this...I would advise people in case if they are not able to pay full amount, it is better to pay only Min Amt Due as part payment has no effect on interest charges) Why this anomaly?/ or is it a systemic fraud?

Harsh Roongta answers, That is not correct. You will pay interest only on the amount unpaid (which means Rs 9,000 and not Rs 19,000). What might have got you confused is that for the period from the date of incurring the expenditure to the first payment date the interest will be charged on Rs 19,000. After you have made the first payment the interest charged is on the amount remaining to be repaid (Rs 9,000) and not gross amount minus minimum payment due (Rs 19,000).

kesri30 asked, abt 0% balance transfer on Credit Cards, how long can we keep on rotating the fund if we have 3 or more cards?

Harsh Roongta answers, Theoretically indefinitely. Though it will rarely work out in practice due to the inherent systemic issues. Not something I will advise you to do unless you are willing to spend a good part of your day just calling banks and getting your things done.

arvind asked, I have an offer of a personal loan of Rs 1,65,000 at an EMI of Rs 5,288 for 48 months. Should I accept the offer?

Harsh Roongta answers, By using the calculator on www.apnaloan.com you can find out that the effective rate for this loan works out to 23%, assuming the first installment is paid after 1 month from the date of disbursement and monthly thereafter. I am unable to comment on whether the rate is good or not as that will depend on your profile.

kunhal asked, Hi Harsh, I had two personal loans and one housing loans and facing very difficult times to pay off every month. Can I get a top up loan from my housing loan as I am having property in Badlapur?

Harsh Roongta answers, If the value of your property has risen and your income has also risen and if you have not defaulted on any of your loans, you should be in a position to get a top off loan to pay off the personal loans from your existing home loan lender. If he is not willing, another bank may be willing to give higher loan amount to pay off all loans. Of course, not all banks are active in Badlapur and this will restrict the choice of banks available to you.

shariff asked, Hi, i had taken an Housing loan of Rs 900,000 couple of years and Citibank charged me 10.5% Floating and since then they have changed it more then 4 times and now its 14.5% can i change over to Fixed if so how will it benefit me. please suggest. Thanks for your time.

Harsh Roongta answers, 14.5% is a grossly high rate. If you have good income papers and have a impeccable repayment track record on your existing loan, you should consider switching banks. You should get a genuine fixed rate home loan at around 12.50% and floating rate at around 10-10.50% from another bank.

geniusvinny asked, My mother took a personal loan of Rs 2 lakh from Citi Bank about 10 months ago. At the time of taking the loan they promised that we can prepay it by paying 2% charges on the balance amount. Now they are asking for 4%. Please tell us what should be done. We have no written document from them stating their promise.

Harsh Roongta answers, Please read the loan agreement you signed with the bank. That will mention the prepayment charges. If you do not have a copy of the agreement -- most consumers do not ever get a copy of their agreement and some do not bother to keep a copy even if they receive it -- then also if you can try and prove the verbal promise through the evidence of independent people present at the time the promise was made.

You should file an official complaint with the bank on its website. If you do not receive a satisfactory response, you should file an official complaint with the Banking Ombudsman. Since you do not have a written promise, all this may however not result in any relief. But ensure that under no circumstances should you default on your loan commitments as it will completely ruin your chances of ever getting a loan in the future

Debajit asked, Hello Mr.Harsh Roongta, one more. Is there anyway to curtail/stop cold calls of personal loans or free credit card calls on mobile phones/lan phones? There was a court notice sometime back, nothing happened thereafter. Just read CC interest rate article, study is eye opener. Thank you for your precious time.

Harsh Roongta answers, The general Do Not Call registry is expected to be operational within the next few quarters. Meanwhile you can go to the individual websites of the bank and register your number on their individual do not call registries.

J. H. Rao asked, Is it appropriate to buy air conditioner on credit card or by taking personal loan? If personal loan, then from which Bank?

Harsh Roongta answers, Buy it on the credit card but take a personal loan to pay off the amount.

loanoloanoloanmela asked, No Mr.Harsh...say for example..I have 50 day credit free period. I buy something on day 1 for Rs 10,000. On day 50, I pay Rs 6,000. So....why should the bank charge interest for Rs 10,000. The chargeable amount is only Rs 4,000, isn't it?

Harsh Roongta answers, You lose your free credit period if you do not pay off the full amount on due date. This applies with retrospective effect.

abhijitabhijit asked, dear sir, Good afternoon sir ! I took a home loan at 7.5%, and now its 10.25%. whats the logic ... if my salary has not increased and if my budget permits an EMI as agreed earlier. Who should be penalised for this ? Can I do something about this ? pls advice !!!!

Harsh Roongta answers, I am afraid that is the price we pay for living in an economic democracy. Think of it this way. In the bad old days the interest rates were dictated by the government so availability was extremely restricted. With the opening up and liberalisation even as availability has increased we have to bear the fluctuations. It is like the price of foodstuff. Whilst no body is happy about the increase we have to grin and bear it.

nadeem asked, dear sir iam NK SHAIKH frm MUMBAI, I am looking for a personal loan and few months back I did apply in couple of banks but frm there I got the reason as my IT returns are lower in comparison to previous financial year so i wanna know how do i avail a loan on what basis should i apply? I am a self-employed and in recent past my business hadn't done too well..pls guide.

Harsh Roongta answers, I am afraid you will face issues in raisng an unsecured loan. Have you considered looking at secured loans such as loan against jewellery, shares, mutual fund units, life insurance policies, etc?

phatibarua asked, I have an outstanding of Rs 22k on my CC and about Rs 28k on my personal loan. Should I top up my personal loan to pay off my CC outstanding?

Harsh Roongta answers, Yes.

amithazra asked, Two foreign banks are offering Business credit cards to professionals and business men as an alternative to the customary cc limit - at a relatively high interest 2.9% per month,although without the customary securities/mortgages. I am a consultant in my mid fifties with average income and means and looking for soft loans to tide over past financial indiscretions. Have a good record in meeting credit card dues and personal fund interests for more than a year. What in your opinion are the pitfalls in the scheme for me?

Harsh Roongta answers, I will not advise this course of action. Please consider secured loans or even consider soft loans from relatives. Borrowing at such interest rates may only worsen your situation in the future. PLEASE DO NOT TAKE A HASTY DECISION WITHOUT TAKING PROFESSIONAL ADVICE.

Fixed or floating home loans: which is better?

Home loan rates are rising once again. And you are confused if floating or fixed home loan rates are best suited for you.

Will you pay more if you have opted for a fixed home loan rate? What is the difference between the two?

How do you switch from a fixed to a floating home loan rate regime? Is it beneficial in the first place?

Home loan expert Harsh Roongta answered these and other home loan related queries in a chat with Get Ahead readers on February 13.

For those of you who missed the chat, here is the transcript.

yhusein asked, Hi, I am planning to buy a house for myself on home loan. Do home loans include stamp duty, registration, and service tax costs in addition to the value of the flat?

Harsh Roongta answers, Yes. Infact most banks will include the cost of stamp duty, registration and service tax costs as well as things like State Electricty Board deposits, etc.

Akash asked, Hello. Though this may not be exactly your area of expertise, but I would want your feel on whether this is the right time to buy a house? My concern is more from the real-estate value whether it will increase or decrease and secondly whether the home loan rates will increase or decrease moving ahead? Pls advise. Thanks!

Harsh Roongta answers, At Apnaloan.com we have always advised our clients that they should avoid trying to time the market when the property is being bought for your own residence. That advise still holds good though given the current scenario you could possibly wait for around 3 -4 months to see if the much awaited property price correction actually happens.

RaviKumar asked, Hi. Recently I have taken a housing loan from LIC to buy a 3-bed room flat which is under construction and is expected to be completed by Sept '07. LIC released part of the total sanctioned amount as the flat is under construction. Balance amount will be released in other two phases. Now I submitted the loan amount papers in my office to claim tax benefits for home loan. But I came to know that tax exemption could be claimed only on the principal amount and not on the interest amount. Is it so??? If that is the reason from when I can get full tax benefits. Please explain. Thanks.

Harsh Roongta answers, I'm very sorry to disappoint you but no tax benefits (neither principal nor interest) will be available for the year ended March 31, 2007 since the construction is not complete. For a more comprehensive answer please check the detailed in this regard at http://www.apnaloan.com/.

Ram asked, Given the frequent interest rate fluctuation, which one would you advise for a person who would be going for a Home Loan, is it the Fixed Rate or the Floating Rate?

Harsh Roongta answers, This is one question that bothers all buyers. Fixed gives a sense of security... while you wonder am I paying too much all the time. Our recommendation on this million-dollar question is given below.

Firstly this is not a one-time decision and needs to be reviewed periodically. Secondly understand what exactly "Fixed rate" and "Floating rate" mean before you take a decision.

Fixed Interest Rate loans: These loans are normally priced higher than a variable rate loan for a similar tenure. That is, in the present market scenario while you would be able to get a floating rate loan for 20 years at 9.5 per cent interest rate, the fixed rate would be somewhere around 10.5 to 11 per cent.

The other option is variable/floating rate loans. This kind of loan is also called 'adjustable rate' home loans. Here, the interest rate is linked to a benchmark rate. Some banks use their 'prime lending rate' (PLR) as the benchmark rate. Some banks have a specific benchmark rate that they use for home loan purposes.

Typically, the interest rate applicable to your loan tends to be a certain percentage below this benchmark rate and ideally the benchmark rate should vary exactly as per the market conditions (though it rarely does � it is quick to go up but rarely shows the same alacrity while going down).

Apnaloan.com's recommendation is to go in for a transparent floating rate in today context (this answer is given in February 2007).

Vikas asked, Hi Harsh, I have recently bought a property in Navimumbai. The builder has informed me that there is a service tax applicable on the sale of new flat (4.04% of agreement value). He also informed that the matter is subjudice and I need to give him a Bank Guarantee for the amount of service tax. Please tell whether such tax is applicable as I have already paid the stamp duty and registration. Are banks giving guarantee like the one asked for?

Harsh Roongta answers, Please ask your builder to provide his service tax registration number if you have been asked to pay anything on account of service tax.

The applicability of service tax on construction contracts is disputed but is not likely to materialise. The bank guarantee sounds like a better option though the problem is that you will have to cough up the whole amount as security for bank to provide the bank guarantee to the developer. The only benefit is that you will earn interest on the same.

sanu asked, With an income of Rs 3 lakh, can a person have his/her Flat in Navi Mumbai? Will it be possible? The increasing interest rates are also creating problems for buyers. Can you help us in this regard?

Harsh Roongta answers, As a rule of the thumb you will get about 3.5 to 4 times your annual gross income as a 20 year loan. Hence you will be eligible for a loan of around Rs 11-13 lakh.

hitesh asked, Hello sir, I am planning to purchase a flat before March '07 @ Rs 25 lakh. Pls let me know which bank will be suitable for me to take the loan & what will be the interest rate?

Harsh Roongta answers, The only answer to that question is that you will have to ask around and find out which bank is best suited for your profile and your needs. Contrary to popular opinion the lending banks do not have a menu card of interest rates which is available to every borrower. The rates, the loan eligibility and the other terms and conditions vary based on who you are and what your need is.

v_gate asked, Hi have taken fixed rate home loan at 7.25% for 10 years, some 1.5 years back. What I have read recently is floating rate is better than fixed rate. Can you please let me know if I should switch to floating rate?

Harsh Roongta answers, Sir you are in paradise already. Why should you want to shift. :-) :-) A fixed rate of 7.25% means you have tied in at what perhaps was the lowest fixed rate ever. So stay put and enjoy the fruits of your correct decision made earlier.

hy asked, Hello sir, I am staying in rented house at Mumbai. My residence is in Mumbai but far away from my office both are in Mumbai. I have a loan against my residence. Can I claim HRA & housing interest or both? Please answer.

Harsh Roongta answers, Contrary to popular opinion, there is no restriction under the I-T Act to get both. Many salaried consumers take a home loan to acquire a residential property, but do not stay in that property for various reasons. They stay in rented premises for which they pay rent. If they are receiving a house rent allowance from their employer, a question frequently arises is- whether they can claim exemption of their HRA based on the rent actually paid by them as well as the interest payable on the loan taken to acquire the owned property.

This is such a widespread question that it rightly justifies an elaborate reply justifying that both deductions are available.

LoanSeeker asked, Do I get tax Exemption if I take a loan against property for construction of my house?

Harsh Roongta answers, Tax benefits are available on repayment of a loan (by whatever name called) which is taken to acquire or construct a house property. It is not at all necessary that the property that is acquired/constructed should be pledged to avail of the tax benefits. In fact even an unsecured personal loan is eligible for the tax benefits as long as it can be proved that the loan was used for acquisition/construction of the house property.

chetan asked, Hi. I have a home loan going with ICICI Bank for Rs 9.70 lakh. If I want to do a balance transfer which bank do you suggest?

Harsh Roongta answers, Assuming you have a good track record of payment for a sufficiently long period of time you should be able to get good offerings from any bank. However existing interest rates are very close to what you are paying and you will also need to pay a pre-payment charge to your existing lender as well as a fee to your new lender. So evaluate carefully before making a switch.

BKS asked, Hi HR..... I have taken 2 houses on home loan & availing the income tax benefits. If I would take a 3rd home, is it possible to get income tax benefits? Plz clarify.

Harsh Roongta answers, Contrary to popular opinion there is no overall restriction of Rs 1, 50,000 on the interest payable on a loan taken to acquire/construct a house property or in respect of more than one property. In fact, this deduction is available for any number of properties and is without any limit under specific circumstances.

The calculation of income from house property (which means the rent you earn) has to be done separately for each property owned by a person and the home loan repayments are eligible for deduction for each such property. The deduction for interest payable on a loan taken to buy/construct house property (ies) (if you have more than 1) is not subject to any overall limit.

As explained earlier, the limit of Rs 1, 50, 000 is applicable only while calculating the income from one self-occupied property.

Iyer asked, Hello Mr. Roongta: I think Housing Finance institutions have decided to make a killing on the hapless public who have no option but to cough up the exorbitant rates charges by them from time to time. EMI on repayment of a lakh of loan has gone up from Rs 800 to Rs 1100 in a matter of a couple of years! I What do you say?

Harsh Roongta answers, I can understand your anger but you are probably directing it wrongly this time. To give you an analogy when the local shop raises the price of milk do you blame him or the general rise in prices. As far as banks are concerned you are aware of the increase in deposit rates which to a large extent is responsible for the increase in interest rates.

Perhaps the one thing on which the banks can be faulted is the complete lack of transparency in determining the increase/decrease in floating rates. It would probably start happening now.

Amit asked, Sir, I'm age 31, take home salary is Rs 45K per month, at present servicing a home loan of Rs 10 lack by paying an installment of Rs 10K., monthly expenses of Rs 25K. My questions are 1) Is this a right time to sell your old house and buy a new house? 2) My Salary is able to serve additional housing loan if any? and how much? Thanks.

Harsh Roongta answers, You should be able to get a sanction for about Rs 20 lakh loan minus your existing loan of Rs 10 lakh which means you should be eligible for a loan of about Rs 10 lakh.

chandu asked, I have two home loans. Can I avail tax benefit on both the loans?

Harsh Roongta answers, Contrary to popular opinion there is no overall restriction of Rs 1, 50,000 on the interest payable on a loan taken to acquire/construct a house property or in respect of more than one property. In fact, this deduction is available for any number of properties and is without any limit under specific circumstances.

The calculation of income from house property (which means the rent you earn) has to be done separately for each property owned by a person and the home loan repayments are eligible for deduction for each such property. The deduction for interest payable on a loan taken to buy/construct house property (ies) (if you have more than 1) is not subject to any overall limit. As explained earlier, the limit of Rs 1, 50, 000 is applicable only while calculating the income from one self-occupied property.

Palanisamy asked, Dear Mr.Harsh, I have taken partial disbursement of my home loan without any Pre-EMI. I am paying only EMI. Construction will get completed in June 2007. Can I claim the interest and principal (Rs 35,000 each) components for IT exemption for financial year 2006-07?

Harsh Roongta answers, There is a misconception that you can get tax deductions by paying EMIs instead of pre-EMI during the construction period. This is simply not true. It does not matter whether you pay EMI or pre-EMI. For the year ended march 31, 2007 you will not be eligible for any tax benefits at all as the property will remain under construction as on march 31, 2007.