In your interest.
Online Personal Finance Magazine
No beating about the bush.
Moneylife Foundation invited Advocate Bapoo Malcolm explain to a packed house of over 80 attendants the practical aspects of preparing a will. Over the course of the interactive two-hour session, which mostly consisted of participants asking a string of questions, Mr Malcolm covered privileged, holographic and joint wills, registration, litigation possibilities, executors and intestate problems
Mumbai’s housing societies are up in arms against the hefty property tax bills, with arrears for the past three years, they have recently received and the even fatter bills they are expected to receive in the coming years. Rajendra Thacker, president, Society for Fast Justice, explained why there was absolutely no need to raise the tax and suggested specific remedies to various problems
Due to great public interest in the matter, Moneylife Foundation held a seminar on the property tax burden by Rajendra Thacker, president, Society for Fast Justice, just two months after Ashok Ravat and Advocate Godfrey Pimenta helped people understand the problems with the capital value method used by the BMC to arrive at the new property taxes.
Mr Thacker, a veteran of many public interest litigations, most of them successful, first discussed BMC’s (BrihanMumbai Municipal Corporation) official reasons for changing its method of valuation. He said, “Officially, the BMC said it wished to move away from the rateable value method because it wanted to rationalise the system, as the old one did not factor in all that was necessary. The new one is, however, no more rational than the old one and has increased taxes substantially.”
The main reason the capital value method is flawed is that it uses the Ready Reckoner value, which is not supposed to indicate real value. The Ready Reckoner value is only supposed to be used to calculate stamp duty, not to assess capital value. By using this rate, the BMC has ensured that flats over 500 sq ft pay high taxes, of up to three times what they were earlier paying, and has given itself permission to raise taxes on smaller flats by 40% from 2015. Mr Thacker said, “The BMC collects taxes from us for certain facilities, such as water, maintenance, among other things. If you see what we’re paying and compare it with what is spent, you’ll notice that there has always been a surplus. If there is a surplus, why do they need more of our money? I filed an RTI to find out what exactly is the figure and how the new method was decided, but I received no answer. This is why I filed a PIL. This is because if there is something wrong with my bill, there is something wrong with everyone’s bill in Mumbai.”
Recently, the last date for payment of the bill sent with arrears was postponed to 30th June from 31st March and it was said that the guidelines will be changed. Mr Thacker said, “If there is something wrong with the guidelines, which is the only reason why they will propose to change it, why should we be paying it? Furthermore, I don’t see why there is such difference in the bills we are receiving. The BMC is charging us for the services it provides us, as under Section 61 and 62. There shouldn’t be such a grave difference in the price for these services in Borivali and Colaba.”
The BMC’s new property tax rules, Mr Thacker said, make it seem as if it is a crime to be rich. He said, “Those who earn more money are already paying higher taxes and were always paying for living in larger homes. But now the BMC wants us to pay extra if the builder used certain expensive materials to build our homes or if we live on higher floors. Why should property taxes be based on the floor I live on? Does the BMC provide better services to those on higher floors?”
BMC’s rules cannot be arbitrary, but this is exactly what is happening with its current property rules. Mr Thacker said, “I own two shops in Borivali, one of which is 451 sq ft, while the other is 300 sq ft. For the larger shop, I pay Rs300 as tax on now. I’m paying Rs1,300 on the smaller one, though. Now how this is happening is unclear. This is why we need to go to court.”
Mr Thacker advised property owners who have found errors in their bills to send their objections to the BMC. For example, a tenant in a 49-year-old building received a bill of Rs934, but this was based on calculations for an 18-year-old building. Mr Thacker advised him to prove to the BMC that his building was 49 years old, by sending proof, such as a ration card or occupation certificate.
Another participant asked what the difference between rateable system and capital value system was. Mr Thacker said, “The old system was according to the rent you could fetch and various other complicated factors. It was an incomprehensible method, but the BMC was doing it. The capital value system factors in the flat value, the materials used to construct the building, the floor you live on and many other things.”
Finally, Mr Thacker asked participants to send their bills (both old and new) to him or Moneylife Foundation, in English, Gujarati or Hindi, so that he and his team could go further their investigation into the matter.
How do you plan for retirement when so many relevant questions are unanswered? You don’t know how long you will live for, but can you calculate what your expenses will be, how inflation will affect expenditure, and much else. Debashis Basu, trustee of Moneylife Foundation, presented a clear picture to the participants in a session on retirement, explaining of the various factors to be considered and the dangers of insufficient planning
Moneylife Foundation hosted the first of its two-part seminar on retirement planning on 23 March 2013. Addressing a packed audience at the Moneylife Knowledge Centre, Debashis Basu, trustee of Moneylife Foundation, discussed how to arrive at a figure that will be sufficient to last a retired life. Mr Basu began by discussing how and why it is neglected. He said, “We rarely ever bother to make the calculation, even though it is not difficult at all. One reason why it is not done is because there are competing objectives. When retirement planning is supposed to be ongoing, there are EMIs (equated monthly instalments) to pay off and the high cost of college education. Another reason is that there is much that is simply not known. Many assumptions are to be made when making a retirement plan.” Assumptions, he argued, may prove to be right or wrong, but this is no reason not to make them at all.
Mr Basu then moved on to a fictional scenario, which spanned over 40 years, to help participants understand how to formulate a plan. He said, “In this example, I have assumed everything. I have assumed that a 45-year-old man named Mr Kumar is earning Rs60,000 a month, saves Rs15,000, spends Rs20,000, has Rs20 lakh in savings and an EMI to pay off. At the same time, he is worried about his children’s higher education and wishes to travel abroad when he’s retired, two objectives competing with a much-needed retirement plan for his finances.”
If your income grows as inflation rages on, it may be possible to ignore the adverse effects of inflation. But when your income is static, it becomes a major problem. Mr Basu said, “If Mr Kumar spends Rs20,000 a month now, in 15 years, when he’s 60 and retired, he’ll be spending Rs72,000 a month. But let’s agree that his expenses drop to 80% in retirement. This means that, at 60 years, he’ll be spending Rs60,000. Have you any idea what his monthly expenses will be when he’s 85 years old? Rs480,000 a month. It’s certainly not unlikely that he will live till age of 85. In urban India, it is common. At the same time, inflation is always higher than the national figure for urban India.”
Indians do save their money, but often don’t look beyond fixed-income schemes, such as bank FDs or investment-oriented insurance products. Mr Basu said, “I have assumed that Mr Kumar has invested in recurring deposit and money-back plans. FDs give very poor post-tax returns and we’ve examined traditional insurance plans at Moneylife and found that they don’t give anything more than 6% to 7%. This is not a good rate of return. What Mr Kumar is then left with is his largest asset, which is his house. But this is an illiquid asset, which means it isn’t income-generating.”
With poor returns from investment and high inflation, how long does Mr Kumar’s retirement corpus last? Mr Basu calculated that, if Mr Kumar’s Rs20 lakh grew at 7% and he put aside Rs15,000 each month until he was 60 years, which also grew at 7%, the corpus would work out to Rs1.03 crore. If inflation then continued each year at 9%, which is likely to happen in India, Mr Kumar would run out of funds by the time he turned 77. This led to the second part of the session, when Mr Basu discussed what went wrong.
The reason why Mr Kumar’s retirement corpus was insufficient was that he did not account for the six unknowns—underinvestment risk, the risk of longevity, failure to account for sudden spikes in monthly expenses, the dominance of a non-income-generating asset real estate in the portfolios, low growth of assets and post-retirement support.
Mr Basu said, “Underinvestment risk is the danger of not having saved or invested enough for retirement, if not both. The second risk, longevity, is a big concern. The longer you live, the more likely it becomes that you will run out of money.”
The third factor, failure to account for sudden spikes in monthly expenses, is one that is completely unknowable. You cannot, for example, predict when you’ll need surgery in your later years. Mr Basu said, “We have assumed that your retirement expenses will be 80% of current expenses. But what about the month when you need surgery or are under costly medication? At this time, it could be 135% of current expenses.
The problem of overreliance on property is another problem. “Real estate works just like stock. It can go up, it can go down. In a good economic scenario, real estate appreciates, at other times it can be static. At the same time, we must remember that it many areas even in Mumbai, rental income is just 2% per annum of the property value. Your largest asset should generate a return of more than just 2%.” Mr Basu advised equity exposure as a means to achieving a sizeable corpus. Mr Basu said, “It’s difficult if you’re not the type to take risk, but you have to convince yourself. It’s the only asset class that is able to give higher returns. Of course you may have invested in mutual funds or stocks in 2008 and decided never to do so again. But you must realise its potential. Healthcare costs are rising at 20% compounded every year. A fixed deposit cannot meet this rising expense. Equity can at least try.”
Lastly, Mr Basu discussed one unknown that even he did not take into account. He said, “I haven’t included support, both monetary and non-monetary, from a son, daughter or any other family member. Indian children do support their parents, so perhaps you won’t need to bother about that big healthcare cost. I haven’t taken this into account because it’s different for different people.”
The session was followed by an engaging Q&A session, which addressed topics such as property rates, rentals and reverse mortgage. The second part of the session, the date for which will soon be announced, will focus on how best to generate this retirement corpus.