Young people lean too much on their parents for financial support. Here’s how you can ease their burden in times of rising expenses and uncertain returns.
By Sakina Babwani, ET Bureau | 25 Nov, 2013, 09.44AM IST | Economic Times
Ask a B-school aspirant, ‘Who will pay for your education?’ In most cases, the answer will be ‘My parents, who else?’ It’s also likely that parents will foot the wedding bills of their 30-something children. Even 40-year-olds take financial help from parents to buy their homes.
Unlike in the West, where people become independent as soon as they cross their teens, Indians never stop depending on their parents. In the West, it’s almost a stigma if a young adult is living with his parents. In India, it is assumed that parents will fund all the needs of their children.
A survey by HSBC shows that one out of every two retirees is funding his children’s needs (see graphic). In fact, 44% of the retirees who had not saved enough gave this as a reason for the shortfall. “Funding dependants in retirement is more common in India than the global average, with 52% funding their children even though they have retired,” notes the study.
This trend seems set to continue: a large majority of working-age people expect to be funding dependants in retirement, with only 29% not expecting to do so.
How you can ease your parents’ financial burden. So deeply ingrained is this attitude that parents consider themselves failures if they are not able to pay for their kids’ higher education, marriage and homes. “Children seldom think of financing their own needs. Only in rare circumstances, if parents are low-income earners, do children look for alternate sources to achieve their goals,” say
But this overburdening can wear out parents financially, especially those who belong to the sandwich generation. Such parents not only have to take care of their children’s needs, but also of their own parents, who typically have no source of income and depend entirely on them.
Our cover story this week tells you how to lessen the financial burden for your parents by saving and investing for your goals on your own. It will act as a breather for your parents, who can focus on their retirement planning by not having to save for you. Here are some tips that will not only ease your parents’ load but also make you financially independent.
Take an Education Loan
Till about a decade ago, school fees and related costs were within manageable limits. Now, however, studying in a public school can skew the household budget. An Assocham study says that the average annual cost of a school going child has risen almost three-fold from Rs 34,000 in 2005 to Rs 94,000 in 2011. According to an ET Wealth estimate, urban middle class parents spend close to Rs 55 lakh on raising a child from cradle to college, and education expenses account for nearly 45% of the total cost.
If they have already spent so much on your education, is it fair to expect your parents to arrange funds for your higher education? Instead, you can opt for a loan with your parent as a co-borrower. You can typically take a loan of up to Rs 10 lakh for studying in India and up to Rs 20 lakh for studying abroad. The interest rates on education loans range from 10% to 18%, depending on the bank and the type of course applied for. The good part is that the interest you pay on the loan is fully tax deductible, so your effective rate of borrowing comes down. The tax breaks are available for up to eight financial years. “An education loan is not only tax-efficient but also inculcates financial responsibility in an individual. The EMI prevents him from blowing up his income,” says Sudhir Kaushik, cofounder and CFO of Taxspanner.com.
Student loans are quite comprehensive as they typically cover costs of admission, tuition, boarding and books. You can start repaying the loan after you get a job or after six months of completing the course, whichever is earlier. However, do remember that if you don’t get a job or default on the payment, your parent, who is the co-borrower, will have to repay the loan.
Start Saving and Investing
The biggest thrill of earning money is the financial independence that comes with it. You don’t need permission from anybody before buying that slick new smartphone or that expensive dress you have been eyeing for weeks. Instead, you just swipe that small piece of plastic in your purse and purchase it. Would it not be great if you could extend this independence to larger items, such as funding your wedding or buying a house? Yes, it is difficult to build a corpus that runs into lakhs of rupees when you barely make Rs 30,000 a month.
However, large corpuses are not built in a day. It requires discipline and patience. If you diligently invest a portion of your income every month, you can build a sizeable portfolio in a few years. For example, even a modest investment of Rs 3,000 a month in a plan that grows at 12% annually would grow to Rs 2.18 lakh in three years. In five years, it would grow to Rs 4.12 lakh. Mumbai-based Akash Bhatia (see picture) has learnt the art of investing even before he has started earning.
“I started by investing a portion of my pocket money in stocks. Though I made a few mistakes, today I am sitting pretty on a corpus of Rs 2.5 lakh,” says the 22-year-old MBA student, who has been investing steadily for the past four years. In fact he was able to pay his course fee of Rs 1 lakh from his own investments.
However, experts believe that stocks are not the best investment option for newbie investors. “You can start with a recurring deposit and then move to mutual funds through the SIP route. Ideally, direct equity investment is for someone who has the time to devote to indepth research and analysis,” says certified financial planner Jayant Pai. If you haven’t started earning and your pocket money is too low, consider taking up a part-time job. It will not only help you earn some money but you will gain practical experience, which could prove invaluable in your career.
Share Household Expenses
If you are living with your parents, it’s only fair that you contribute to the household expenses. Your parents may not ask you to contribute and even dissuade you from doing so, but given that they are close to retirement, you should shoulder a significant burden of the monthly household expense.
Remember, if you allow your parents to save more for their retirement, it will lessen your own burden when they stop working. Paying rent to your parents is perhaps the most tax-efficient way of contributing to the expenses. If your employer offers you a house rent allowance as part of your compensation, you can claim exemption for the rent paid.
However, this is possible only if the property is registered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of Rs 3 lakh a year (Rs 25,000 a month), he will be taxed for only Rs 2.1 lakh.
It gets better if the property is jointly owned by both parents. Then you can divide the rent between them so that the tax liability is split between them. If their income exceeds the basic exemption limit, you can help them save tax by investing in their name under Section 80C options, such as the Senior Citizens’ Saving Scheme, five-year bank fixed deposits or tax-saving equity mutual funds.
Pune-based IT professional Satyam Chawla (see picture) lives in his father’s house and pays him rent while his own residence has been rented out. “In this manner, not only is my father financially independent, but I can take care of him as well,” he says.
Some parents may not agree to take money from their children. So, the helping hand will have to be subtle. Buy health insurance for them, which is a real need for people heading for retirement. It also helps you save tax. Up to Rs 15,000 paid as premium for the health insurance of parents can be claimed as a deduction under Section 80D. If any of the parent is a senior citizen, the deduction is higher at Rs 20,000. This is over and above the Rs 15,000 deduction for your own family. Also, this deduction is available irrespective of whether parents are financially dependent on the taxpayer or not.
Be Open to Reverse Mortgage
Too many parents are not able to save for retirement because they allocate too much of their resources to their children’s needs and in building a house. If your parents are also asset-rich but cash-poor, reverse mortgage can unlock the value of their property.
In such an option, the bank pays a monthly amount to the owner of the house. With each payment, the bank’s ownership of the property increases. After the death of the owner, his legal heirs can either repay the loan, along with the interest, or let the bank sell the property. The bank will deduct the borrowed amount from the sale proceeds and give the balance to the heirs. The option of reverse mortgage is only available to senior citizens and they should be living in the house.
Reverse mortgage is a good way of earning an income by unlocking the value of real estate without selling it. But many youngsters oppose any such move by their parents because it imposes a liability on them. They don’t realise that the property is not being sold but is only partially mortgaged. Even if the parents take a monthly income of Rs 20,000 from the bank, it will take them 4-5 years to rack up a loan of about Rs 12 lakh.
However, it will allow the parents to live a life of dignity and financial freedom. Besides, they won’t have to lend financial support to their parents if they have a monthly income. Be open to the idea of reverse mortgage and explain the concept to your parents. A small tip: it’s good to involve all the stakeholders in such discussions lest a sibling feels that you are trying to sell the property.
Can children be sued for not caring for parents?
The law ensures that seniors are not left in the lurch.
THE SIMPLE answer is ‘yes’. Under Section 125 of the Criminal Procedure Code, 1973, and Section 5 of the Maintenance and Welfare of Parents and Senior Citizens Act, 2007 (MWPSC Act), parents can sue their children if they do not maintain them in their old age. However, this is applicable only if parents do not have any source of income to support themselves. A senior citizen can even sue a grandchild or any legal heir, provided he is not a minor.
The MWPSC Act goes a step further in protecting their rights. If a senior citizen has gifted his property on the condition that his child or relative will take care of his needs and the child goes back on his word, the transfer shall be considered as made through fraud or coercion and, hence, will be considered void. In 2012, 74-year-old M Jagadeesan of Madaraalli district in Tamil Nadu filed a complaint that his son, Anbarasan, had driven him out of the house.
After an inquiry, the district police was asked to assist Jagadeesan in getting his property back. While the law protects the rights of senior citizens, it also does not ignore the rights of creditors. If a borrower dies without repaying a loan, his children cannot be forced to pay. However, any asset belonging to the deceased person will be liquidated to repay his debts.
Source : http://goo.gl/IUFDwE