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SAVINGS AND INVESTMENTS


08-08-2010 This is a small paper on Savings and Investments, intended for the average-income employee, earning a monthly salary with possible annual bonuses. The nature of this paper is purely advisory and is based on practical applications of a persons wealth / income, depending on his/her requirements and priorities. It does not touch upon Immovable Property investments such as Land or House purchases. Income Tax-saving angles are clearly mentioned (ITB) where applicable. Details of Tax Benefits under respective sections of the Income Tax Act are given later in the paper.

DIFFERENCE BETWEEN SAVINGS AND INVESTMENT


Savings: 1. Savings, in the context of this paper, means the accrual of money in safe avenues with low risk, moderate to low returns but assured by a legal entity such as the Govt. of India. 2. Savings are primarily carried out for securing ones own future and that of ones immediate family members, so as to have financial peace of mind at a later stage, such as retirement or Passing Away of the Sole or Main Earning member of the Family. 3. Part of savings also involves keeping super-liquid & liquid cash towards emergencies and medical expenses. 4. The words Savings may also include Life Insurance Policies that are targeted or used to secure the financial future of an Earning or Non-Earning Family member. 5. Savings is mainly to secure your own financial-future, without having to depend on anyone else in your old age. At the risk of sounding selfish, it is advisable to start Saving early in life, and save a large amount as soon as possible, so that one is financially-independent in ones old age. Anything by way of our children looking after us is to be considered as bonus. Such is life. Investments: 1. Investments, in the context of this paper, means the accrual of additional or surplus wealth (after completion of savings) in moderate to high risk avenues, with moderate, high or very high returns, and little or no assurances by the Financial Institution. 2. In most Investments, there is no Legal Entity which backs up the returns. 3. Investments are primarily carried out once most (or all) Savings avenues are exhausted or completed and the investor can afford to take higher risks in the hope/aim of higher returns. 4. Investments may be made such that the returns may be enjoyed by either the Investors themselves or by beneficiaries chosen by investors, even during the investors lifetime. Thus, while Investments may be for the benefit of anyone that the Investor chooses, Savings MUST be solely for the benefit if the investor alone, and after his/her passing away, should go to the respective nominee(s).

5. In some cases, depending on a persons profile, some elements of Investments may come under Savings and vice-versa.

GENERAL TREND FOR SAVINGS AND INVESTMENTS: Generally speaking, the following is the best route for Saving and subsequently Investing your hard-earned salary, and securing a future for yourself and your family. (Some points may be interchanged depending on the investors priority) 1. For Unmarried Persons who have a salaried Job which covers medical bills for themselves as well as their parents: (i) Public Provident Fund (PPF) Max. Limit Rs.70,000/- per year. (ITB) (ii) 6 years Post Office Monthly Income Scheme (POMIS) Max. Limit Rs.4.5 Lakhs in Single name or Rs.9 Lakhs in Joint names. [Option to couple with Recurring Deposit Account]. (ITB) (iii) Suitable Life Insurance Policies for self as well as Parents, preferably from LIC of India Only. (ITB). For choosing a policy which benefits as well as suits you, please see http://www.licindia.in/index.html and check out the options available under the PRODUCTS Tab. (iv) Bank or Post Office Fixed Deposits for an amount chosen by the investor which he/she feels is sufficient to act as Liquid Cash. (Usually about Rs.50,000/- to Rs.2 Lakhs depending on health of all the family members). (v) Medical Insurance Policies over and above the limit covered by the Employers medical Policies, depending on health of all family members. (vi) Post Office Time Deposits (5 years option preferable) / Post Office 6 years National Savings Certificate. (ITB) No investment limits. Investors may choose to put in any amount which they feel is adequate or appropriate. (vii) Mutual Funds. (ITB) (viii) Post Office 6-years National Savings Certificate (NSC) (ITB) and/or 9-years Kisan Vikas Patra (KVP) No investment limits. Investors may choose to put in any amount which they feel is adequate or appropriate. (ix) Government of India Bonds such as RBI Bonds. (x) Government of India Bonds such as Rural Electrification Bonds, Roads & Highways development Bonds etc. Section 54 EC (Capital Gains) & Infrastructure Bonds, Section 80 cc(f). (ITB) (xi) Shares purchased outside the Mutual Fund Route (depending on investors stock-market ability). (xii) Gold, Silver, Gems, Other Precious Metals (Depending on investors Optimism). (xiii) CHIT FUNDS: The entire concept and working of Chit Funds may be found on http://en.wikipedia.org/wiki/Chit_fund . Although the Chit Funds are Legally covered by the CHIT FUNDS ACT 1982, many Chit Fund Companies (including big ones) have folded-up in the past, leaving investors high and dry. Hence Chit Funds are treated as Very High Risk Investments in this paper. There are a number of dependable companies in this field, but these are few and far between. They are usually family-run affairs and rarely encourage outsiders as investors, in order to keep the company financially secure.

2. For Unmarried Persons who have a salaried Job (or business/profession) which does not cover medical bills for themselves and their parents: (i) Public Provident Fund (PPF) Max. Limit Rs.70,000/- per year. (ITB) (ii) Medical Insurance Policies for a suitable amount, depending on health of self and all family members. (iii) Suitable Life Insurance Policies for self as well as Parents, preferably from LIC of India Only. (ITB). For choosing a policy which benefits as well as suits you, please see http://www.licindia.in/index.html and check out the options available under the PRODUCTS Tab. (iv) 6 years Post Office Monthly Income Scheme (POMIS) Max. Limit Rs.4.5 Lakhs in Single name or Rs.9 Lakhs in Joint names. [Option to couple with Recurring Deposit Account]. (ITB) (v) Bank or Post Office Fixed Deposits for an amount chosen by the investor which he/she feels is sufficient to act as Liquid Cash. (Usually about Rs.50,000/- to Rs.2 Lakhs depending on health of all the family members). (vi) Post Office Time Deposits (5 years option preferable) / Post Office 6 years National Savings Certificate. (ITB) (vii) Mutual Funds. (ITB) (viii) Post Office 6-years National Savings Certificate (NSC) (ITB) and/or 9-years Kisan Vikas Patra (KVP) No investment limits. Investors may choose to put in any amount which they feel is adequate or appropriate. (ix) Government of India Bonds such as RBI Bonds. (x) Government of India Bonds such as Rural Electrification Bonds, Roads & Highways development Bonds etc. Section 54 EC (Capital Gains) & Infrastructure Bonds, Section 80 cc(f). (ITB) (xi) Shares purchased outside the Mutual Fund Route (depending on investors stock-market ability). (xii) Gold, Silver, Gems, Other Precious Metals (Depending on investors Optimism). (xiii) CHIT FUNDS: The entire concept and working of Chit Funds may be found on http://en.wikipedia.org/wiki/Chit_fund . Although the Chit Funds are Legally covered by the CHIT FUNDS ACT 1982, many Chit Fund Companies (including big ones) have folded-up in the past, leaving investors high and dry. Hence Chit Funds are treated as Very High Risk Investments in this paper. There are a number of dependable companies in this field, but these are few and far between. They are usually family-run affairs and rarely encourage outsiders as investors, in order to keep the company financially secure.

3. For Married Persons who have a salaried Job which covers medical bills for themselves, their spouse and their parents: (i) Public Provident Fund (PPF) Max. Limit Rs.70,000/- per year. (ITB) (ii) 6 years Post Office Monthly Income Scheme (POMIS) Max. Limit Rs.4.5 Lakhs in Single name or Rs.9 Lakhs in Joint names. [Option to couple with Recurring Deposit Account]. (ITB) (iii) Suitable Life Insurance Policies for self, spouse and Parents, preferably from LIC of India Only. (ITB). For choosing a policy which benefits as well as suits you, please see http://www.licindia.in/index.html and check out the options available under the PRODUCTS Tab.

(iv)

(v) (vi) (vii) (viii)

(ix) (x) (xi) (xii) (xiii)

Bank or Post Office Fixed Deposits for an amount chosen by the investor which he/she feels is sufficient to act as Liquid Cash. (Usually about Rs.50,000/- to Rs.2 Lakhs depending on health of all the family members). Medical Insurance Policies over and above the limit covered by the Employers medical Policies, depending on health of all family members. Post Office Time Deposits (5 years option preferable) / Post Office 6 years National Savings Certificate. (ITB) Mutual Funds. (ITB) Post Office 6-years National Savings Certificate (NSC) (ITB) and/or 9-years Kisan Vikas Patra (KVP) No investment limits. Investors may choose to put in any amount which they feel is adequate or appropriate. Government of India Bonds such as RBI Bonds. Government of India Bonds such as Rural Electrification Bonds, Roads & Highways development Bonds etc. Section 54 EC (Capital Gains) & Infrastructure Bonds, Section 80 cc(f). (ITB) Shares purchased outside the Mutual Fund Route (depending on investors stock-market ability). Gold, Silver, Gems, Other Precious Metals (Depending on investors Optimism). CHIT FUNDS: The entire concept and working of Chit Funds may be found on http://en.wikipedia.org/wiki/Chit_fund . Although the Chit Funds are Legally covered by the CHIT FUNDS ACT 1982, many Chit Fund Companies (including big ones) have folded-up in the past, leaving investors high and dry. Hence Chit Funds are treated as Very High Risk Investments in this paper. There are a number of dependable companies in this field, but these are few and far between. They are usually family-run affairs and rarely encourage outsiders as investors, in order to keep the company financially secure.

4. For Married Persons who have a salaried Job (or business/profession) which does not cover medical bills for themselves, their spouse or their parents: (i) Public Provident Fund (PPF) Max. Limit Rs.70,000/- per year. (ITB) (ii) Medical Insurance Policies for a suitable amount, depending on health of self, spouse and all family members. (iii) Suitable Life Insurance Policies for self as well as Parents, preferably from LIC of India Only. (ITB). For choosing a policy which benefits as well as suits you, please see http://www.licindia.in/index.html and check out the options available under the PRODUCTS Tab. (iv) 6 years Post Office Monthly Income Scheme (POMIS) Max. Limit Rs.4.5 Lakhs in Single name or Rs.9 Lakhs in Joint names. [Option to couple with Recurring Deposit Account]. (ITB) (v) Bank or Post Office Fixed Deposits for an amount chosen by the investor which he/she feels is sufficient to act as Liquid Cash. (Usually about Rs.50,000/- to Rs.2 Lakhs depending on health of all the family members). (vi) Post Office Time Deposits (5 years option preferable) / Post Office 6 years National Savings Certificate. (ITB) (vii) Mutual Funds. (ITB)

(viii)

(ix) (x) (xi) (xii) (xiii)

Post Office 6-years National Savings Certificate (NSC) (ITB) and/or 9-years Kisan Vikas Patra (KVP) No investment limits. Investors may choose to put in any amount which they feel is adequate or appropriate. Government of India Bonds such as RBI Bonds. Government of India Bonds such as Rural Electrification Bonds, Roads & Highways development Bonds etc. Section 54 EC (Capital Gains) & Infrastructure Bonds, Section 80 cc(f). (ITB) Shares purchased outside the Mutual Fund Route (depending on investors stock-market ability). Gold, Silver, Gems, Other Precious Metals (Depending on investors Optimism). CHIT FUNDS: The entire concept and working of Chit Funds may be found on http://en.wikipedia.org/wiki/Chit_fund . Although the Chit Funds are Legally covered by the CHIT FUNDS ACT 1982, many Chit Fund Companies (including big ones) have folded-up in the past, leaving investors high and dry. Hence Chit Funds are treated as Very High Risk Investments in this paper. There are a number of dependable companies in this field, but these are few and far between. They are usually family-run affairs and rarely encourage outsiders as investors, in order to keep the company financially secure.

5. For Senior Citizens: As Senior Citizens usually have fewer obligations (children married and working, self having retired, most savings avenues completed etc.) and special financial avenues of savings and investments available to them, their portfolios are different from that of the previous 4 instances: (i) Public Provident Fund (PPF) Max. Limit Rs.70,000/- per year. (ITB) (ii) 6 years Post Office Monthly Income Scheme (POMIS) Max. Limit Rs.4.5 Lakhs in Single name or Rs.9 Lakhs in Joint names. [Option to couple with Recurring Deposit Account]. (ITB) (iii) 5 years Post Office Senior Citizens Savings Scheme (SCSS) Max. Limit Rs.15 Lakhs in Single name or Rs.30 Lakhs in Joint names. (ITB) (iv) Post Office Time Deposits (5 years option preferable) / Post Office 6 years National Savings Certificate. (ITB) (v) Bank or Post Office Fixed Deposits for an amount chosen by the investor which he/she feels is sufficient to act as Liquid Cash. (Usually about Rs.50,000/- to Rs.2 Lakhs depending on health of self and spouse). (vi) Medical Insurance Policies: It is advised that Senior Citizens are normally not covered under fresh Medical insurance Policies; hence they would normally have pre-existing policies which are valid in their advanced years also. If not, special policies may be available for them. Apart from self, it is important that they procure Medical Insurance Policies for all family members. (vii) Suitable Life Insurance Policies for family members, preferably from LIC of India Only. (ITB). For choosing a policy which benefits as well as suits you, please see http://www.licindia.in/index.html and check out the options available under the PRODUCTS Tab. (viii) Post Office 6-years National Savings Certificate (NSC) (ITB) and/or 9-years Kisan Vikas Patra (KVP) No investment limits. Investors may choose to put in any amount which they feel is adequate or appropriate. (ix) Mutual Funds. (ITB) (x) Government of India Bonds such as RBI Bonds.

(xi) (xii) (xiii) (xiv)

Government of India Bonds such as Rural Electrification Bonds, Roads & Highways development Bonds etc. Section 54 EC (Capital Gains) & Infrastructure Bonds, Section 80 cc(f). (ITB) Shares purchased outside the Mutual Fund Route (depending on investors stock-market ability). Gold, Silver, Gems, Other Precious Metals (Depending on investors Optimism). CHIT FUNDS: The entire concept and working of Chit Funds may be found on http://en.wikipedia.org/wiki/Chit_fund . Although the Chit Funds are Legally covered by the CHIT FUNDS ACT 1982, many Chit Fund Companies (including big ones) have folded-up in the past, leaving investors high and dry. Hence Chit Funds are treated as Very High Risk Investments in this paper. There are a number of dependable companies in this field, but these are few and far between. They are usually family-run affairs and rarely encourage outsiders as investors, in order to keep the company financially secure.

Terms used in this paper may be unfamiliar to some readers, hence here is a guide: 1. Investor: Person who puts money into Savings and/or Investment avenue(s). 2. Super-Liquid Cash: Cash which may be obtained on the day of requirement, e.g cash in hand (wallet, safe or in safekeeping with a friend/family member etc.), cash in bank (withdrawn on same day by self cheque, ATM etc.). This amount is generally kept by all investors as per individual requirements and is therefore not touched upon in this paper. 3. Liquid Cash: Cash which may be obtained within 1 to 3 days after the requirement arises, e.g. cash in Bank or Post Office Fixed Deposits which has no lock-in period, Gold (as loans against gold are relatively easily available in todays market). 4. Lock-In Period: The minimum time period that money in an investment or savings avenue cannot be withdrawn. This may be further classified as Fixed Lock-In Period where the money cannot be withdrawn at all in any circumstance, and Penalty Lock-In Period where the money can be withdrawn if the investor is willing to pay a penalty in order to withdraw the balance amount. 5. Risk: In terms of investment, risk means the chance of losing all the money invested. This could be due to crash in stock market, fraud, cheating by Investment Agent, investor being misadvised, Economic Downturn or Natural and National Calamities etc. In terms of Life Insurance, Risk means Death of the Policy Holder. In Medical Insurance, Accidents or Diseases may be termed as Risk. 6. Optimism: The investors judgment that the value of the investment (shares, gold etc.) will go up in future. 7. Nomination: (a) The process of putting a name of the person who will receive the Investors Savings or Investment amount in case the investor passes away before completion of the entire term of the Savings / Investment. Such a person is usually (in the following order) the Spouse, Child/Children, Parents or Sibling(s) of the Investor, and is called the Nominee. (b) The nominee(s) will receive the money nominated to him/her/them, only if there is no dispute or court case filed by relatives or persons of interest, against the nominee for the money. The making of a Will (see point 8, below) by the investor ensures that such disputes do not arise.

(c) Many Investment or Savings Instruments have the option of putting more than one nominee, as long as the Investor specifies the percentage of value (of the instrument) to be given to each nominee. Nomination must be done during the Form-filling stage of the savings/investment itself, but if not done then, must be carried out as soon as possible thereafter. Nominations can be changed at ANY TIME that the investor decides. However, some Financial Institutions like the Post Office have a slightly complicated and tedious procedure for the same. 8. Will: The Last Will and Testament of an investor. It details the distribution of all items that the Investor owns at the time of his/her Passing Away. It is THE MOST POWERFUL AND SUPREME DOCUMENT RECOGNISED BY ANY COURT OF LAW IN INDIA. IN MOST CASES, IT OVERRIDES ANY OTHER DOCUMENT IN A DISPUTE INVOLVING MONEY, PROPERTY ETC. Even Investors who have not yet invested a single Rupee should make a Will which designates recipients or beneficiaries for their electronic and cyber-property such as e-mail accounts, usernames, passwords etc. Further guidelines for the Will, including its general format, can be found later in this paper.

IMPORTANT POINTS TO REMEMBER FOR SAVINGS AND INVESTMENTS


1. Always, ALWAYS, ALWAYS put a nomination for any and every savings and investment that you carry out, regardless of whether it is in Single or Joint names. 2. Always, ALWAYS, ALWAYS prepare a Will which clearly has the statement or clause: All Financial Instruments, Investments, Savings, Bonds, Policies, Life Insurance Instruments etc. held in my name alone, shall pass on to respective Nominees as nominated in each individual Instrument/Policy/Bond etc. In the case of Joint Names, it shall go to the second holder. In the case where both the Joint Holders are deceased together, the respective nominees shall receive such bonds, policies, instruments etc. No persons, other than the respective nominee(s) of the Instrument/bond/policies, shall have any claim whatsoever, on these instruments. 3. Usually, as a person progresses in age, so does his/her financial value/worth. It is but natural that as the person progresses financially as well as in age, their priorities change and thus the Investments and Savings matrix or combination must change accordingly. Children complete their education, get employed and get married, thus leaving more room for Investments and Savings. Financial obligations are more or less completed and a person may want to Invest more as almost all Savings have been carried out. Thus, there may need to be changes in the combination of Savings and Investments of an investor. 4. It is PRUDENT, AND NOT SELFISH to cater to ones own financial future BEFORE securing any other family members. Travelling by any commercial passenger jet, the primary safety-demo shows that ones own Oxygen-mask MUST be secured BEFORE that of your neighbors. 5. Never ever leave the nomination columns in any investment/savings form blank. If, at the time of formfilling, you do not want to fill in nominees (not recommended at all), please, at the bare minimum, put a STRIKETHROUGH LINE or the word NONE or NIL in the Nomination Column. Nominees can be appointed (nominated) at a later stage, but at the time of form-filling, the Nomination Column should not be left blank. For reasons, please see example in point-6, below.

6. If investing through an Agent, please ensure that the Agents stamp (with name and code) is put on the form. If not, please do not fill the form till such a stamp is put. Usually the stamp contains the agents name as well as the agency code. If the agent is not the same as that whose stamp is on the form, please insist on personally meeting the agent whose stamp is put on the form, otherwise there is a very high chance of fraud. Example: It has been seen in the past that some corrupt agents swindle their unsuspecting clients in the following manner: a bad agent (lets say Agent-A) puts another agents stamp (say Agent-Z, who is also in league with the first agent, A) on the form, leaving the nomination column blank. After all signatures of the unsuspecting investor(s), these forms are submitted at the financial institution, through an employee who is also aware and involved in the scam. A few years later, upon death of the investor, both the corrupt agents and the employee coordinate with each other, the old forms are retrieved and the blank nomination column is filled with Agent-A as the nominee. Agent-Z claims the amount on behalf of the Nominee (Agent-A), receives the due amount and both the agents, along with the employee who is involved at the financial institution, share the money between themselves. This practice is seen often in those financial institutions which have no method or practice of displaying the nominees name(s) on the bonds/certificates/passbooks/policies held by the investor. Rare, but nevertheless, definitely carried out in the past. 7. Usually the agent fills up the entire form before taking signature(s) of the investor(s) and this is entirely acceptable. However it is prudent to keep Photocopies/Xeroxes/Scanned-Copies of ALL forms filled and signed by the investor(s). In case of KYC (Know Your Customer) forms, investors MUST ensure that their names and photographs are correctly filled in. 8. Cheques handed over to agents may not have the amount filled up (both words and figures) and this is entirely acceptable, provided: (1) The Cheque is crossed, (2) The Payee column (Pay______) is filled, if possible. If not, the agent MUST be a person well known to the investor. (3) Note down the cheque no. in the cheque-book counterfoil section, leaving out other details until a photocopy of the completed cheque is received from the agent. Compare the cheque no. of the photocopy with that of the counterfoil, and fill the balance details in the counterfoil section of the cheque-book. 9. Always keep acknowledgement slips, photocopies and receipts from agents in a proper file or files so as to keep appropriate track of your investments. All too often, a receipt or passbook misplaced by the investor sends the agent running for duplicates etc. causing a lot of burden on the system in general and on the agent in particular, besides being an embarrassment (not to mention the legal aspect of involving the Police for filing FIRs etc.).

FINANCIAL INSTITUTIONS FOR SAVINGS AND INVESTMENTS


1. For PPF: (i) Public provident Fund accounts may be opened in any State Bank of India (SBI) or your Local Post Office. SBI PPF accounts can be opened only after opening a Savings Account with a deposit of Rs.2000/-. (ii) PPF annual limits (as of the date of writing this paper) per person is as follows: Maximum Limit=Rs.70,000/- Minimum Limit=Rs.500/- per year. This amount can be claimed for Tax benefits Under Section (U/S) 80(C) of the Income Tax Act.

(iii) (iv)

(v)

(vi)

(vii) (viii)

PPF account can be opened for any and every member of the family, including Minors (through a Guardian). It is Imperative that the entire maximum limit should be invested at the beginning of the Financial Year, between the 1st and the 4th of April each year (both dates inclusive). This causes the PPF to give maximum returns and benefits to the holder/investor. Rules for PPF can be found on the Internet at http://finmin.nic.in/the_ministry/dept_eco_affairs/budget/small_savings/ppf_rules1968.pdf , while simple point wise explanations are available at sites such as at: http://www.bajajcapital.com/gss/ppf.html As of this time (Aug-2010), the Investment period is initially for 15 years and renewable thereafter for blocks of 5 years. A typical 20 year period (initial 15-year block + first renewal block of 5 years) may fetch the heavy returns shown in the table below. However, this is subject to the following conditions: (a) Government of India does not reduce the present interest rate (8%) and/or the maximum investment limit amount (Rs.70,000) per year. (b) The full maximum amount (Rs.70,000) to be deposited between 1st and 5th April of that year. (c) No withdrawals are made or loans taken against the PPF account, during the entire period of 20 years. The PPF account is not liable to attachment by any Court Order, even in bankruptcy, debt or other financial liability of the Investor. If renewed for a second block of 5-years (i.e total period of 25 years), the investment is Rs.70,000 x 25 = Rs.17,50,000/- and the closing balance (total amount) = Rs.55,26,809/- which gives us a Return on Investment of Rs.55,26,809 Rs.17,50,000 = Rs.37,76,809. Subject to-No change in interest rates and deposit amount limits. NOTE- Although the ideal circumstances would see the entire Rs.70,000/- being deposited within the first five days of April, sometimes it so happens that due to Bank / National / Festival / Weekend holidays or their combinations, the Financial Institution may close on 1st April and reopen only after 5th April. By Law, the investor is not permitted to deposit the amount before 1 st April and so deposits the amount only after 5th April. IN SUCH CASES, ALL PPF INVESTORS LOSE INTEREST FOR THE MONTH OF APRIL THAT FINANCIAL YEAR. This has happened in the past and may happen in the future too. It is something that all of us have to live with. It cannot be helped, unless the Government of India changes the rules.

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PPF RETURNS FOR A TWENTY YEAR PERIOD


Year
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 total :

Investment Amount
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 1,400,000 Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Principal Amount
70,000 145,600 227,248 315,428 410,662 513,515 624,596 744,564 874,129 1,014,059 1,165,184 1,328,399 1,504,671 1,695,044 1,900,648 2,122,700 2,362,516 2,621,517 2,901,238 3,203,338

Int. %
8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8%

Interest Earned
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. 5,600 11,648 18,180 25,234 32,853 41,081 49,968 59,565 69,930 81,125 93,215 106,272 120,374 135,604 152,052 169,816 189,001 209,721 232,099 256,267

Total Amount
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. 75,600 157,248 245,428 340,662 443,515 554,596 674,564 804,129 944,059 1,095,184 1,258,399 1,434,671 1,625,044 1,830,648 2,052,700 2,292,516 2,551,517 2,831,238 3,133,338 3,459,605 2,059,605

Return On Investment = Rs.

2. For LIFE INSURANCE: (i) Although taking a life insurance policy from any company (private or Government) entitles the Investor a Tax benefit U/S 80(C) of the Income Tax Act, it is HIGHLY ADVISABLE that the Investor go only through Life Insurance Corporation of India (LIC) as this is the only Insurance Company backed by the Government of India. (The Parliament of India passed the Life Insurance Corporation Act on
the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956: Reference: http://www.licindia.in/history.htm).

(ii)

(iii) (iv)

There are literally dozens (if not hundreds) of policies that you can choose from and the combinations are equally various. While choosing a policy the most important factor to remember is the expected income in future (i.e. a rise or fall from ones present income). The second most important factor is the duration of the policy premium payment (i.e. the number of years one is willing, not just able, but WILLING to keep paying premiums). Also keep in mind timing of the maturity of the policy, i.e. adjusting the policy period so that redemption of policy at a time when the money can be put to its best use. Example: A 33 year old

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(v)

(vi)

(vii)

investor has a child aged 1 year old. The child will enter college in about 17 more years and may get married in about 25 to 27 years. So the investor takes 2 policies which mature in say 16 years and 24 years respectively. He may choose to have low yearly premiums and the policy premium payment may stretch to several years, or he may choose to pay for just a few years with a higher annual premium. There are various Policies tailor-made for different persons such as Infants, growing children, working men, career women, home-making women, retirees etc. A suitable policy may be found online at http://www.licindia.in/index.html under the PRODUCTS Tab. A Life Insurance policy is not to be confused with a medical insurance policy. The objective and purpose of a Life insurance policy is to secure your dependents financial future in case of your passing away (called Risk) during the term of the policy, and (depending on type of policy) to enjoy a monetary bonus if you do not pass away before the policy expires. The purpose of a Medical Insurance is to cover medical expenses for those insured medically, in case of an accident (also called Risk). A LIFE INSURANCE POLICY DOES NOT COVER MEDICAL EXPENSES. Some Insurance Policies are linked to the share market and are called Unit Linked Investment Plans (ULIPs). These are supposed to provide some form of Risk cover starting from 01-Sep-2010, and the details are not known as of this time (Aug-10). HOWEVER, these are SUBJECT TO MARKET RISKS (i.e. fluctuations in the Share market) and should not be touched until and unless non market-linked policies are obtained for sufficient amounts as per the investors requirements.

3. For Post Office: The Indian Post Office offers various avenues for saving and growing your money. Apart from PPF accounts, the post office also offers Monthly Income Scheme (MIS), Time Deposit (TD), Recurring Deposit (RD), National Savings Certificate (NSC), Kisan Vikas Patra (KVP) and Senior Citizens Savings Scheme (SCSS). (i) MIS (a) Min. Rs.1500/- or multiples thereof, subject to a max. Rs.4.5 lakhs in single name or min. Rs.3000/- or multiples thereof, subject to a max. Rs.9 lakhs in joint names, at an interest rate of 8% per annum. Interest is paid out monthly. (b) A holder of a joint account in one MIS account cannot legally hold a second MIS account, either jointly with someone else or in single name. For example Husband and Wife have a joint MIS account (total 9 lakhs investment), then Husband cannot have a second MIS account jointly with his child; or wife cannot hold a second account jointly with a child, or brother, sister etc. Nor can Husband/Wife hold a second MIS account in an individual capacity. (c) At the end of 6 years, the holder enjoys a 5% bonus on the invested amount. So the effective interest rate per annum at the end of 6 years comes to 8.8333%. (d) Some investors do not withdraw the money every month. Instead they opt for direct transfer of the monthly interest to a recurring deposit (RD) account. (e) Upon opening an account or renewal of previous account, the account cannot be closed and money cannot be withdrawn for a period of 1 year from the date of opening / renewal. (f) Rs.4.5 Lakhs fetches a monthly income of Rs.3,000/-, while Rs.9 Lakhs fetches a monthly income of Rs.6,000/- (both figures do not include the 5% bonus at the end of 6 years).

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(ii) TD(a) Min. deposit Rs.50/-, Max. deposit- unlimited. (b) Interest Rates: 1 year = 6.25% (As of Aug-2010) 2 years = 6.50% 3 years = 7.25% 5 years = 7.50% (c) Account can be opened by an adult or jointly by two individuals or by a minor who has attained the age of 10 years. Different accounts for different maturity periods may be opened in one name Deposits may be made of Rs. 50 or multiples thereof upto any amount. (d) The premature closure after six months before one year from the date of deposit will be allowed without payment of interest. (iii) RD(a) Min. deposit = Rs.10, Deposits can be in multiples of Rs.5. Max. Deposit = No limit. (A discount is offered if paid for the full year in advance). (b) Period = 5 years. Present (As of Aug-2010) rate of interest = 7.5% compounded quarterly. (c) Example: Rs.10/- per month for 5 years (60 months) = Rs.600/- [Principal Amount invested] At the end of 5 years, the investor receives Rs. 728.90/- i.e. Rs.600/- (Principal Amount) + Rs.128.90/- (Interest Earned). Doesnt seem like much?? Try the following example: (d) Rs.6,000/- received as monthly income (from an investment of Rs.9 lakhs in a joint MIS account), goes directly into the RD account every month. At the end of 5 years, the investor (who has done nothing except used his/her brains) gets a total of Rs.4,37,349/- (i.e. RD Principal = Rs.3,60,000/- and RD Interest = Rs.77,349/-). Similarly, a POMIS single account holder who lets his/her Rs.3,000/- per month go directly into an RD account will receive, at the end of 5 years, a total amount of Rs.2,18,675/- (i.e. RD Principal = Rs.1,80,000/- and RD Interest = Rs.38,675/-). (e) In the above example no.2, a POMIS investment of Rs.9 Lakhs (joint name) fetched a total interest of Rs.5,54,349/- in just 6 years!! How?? First 5 years a combination of MIS and RD fetched a total interest of Rs.4,37,349/- + 6th year MIS interest of Rs.72,000/- (Rs.6,000/- per month x 12 months) + Rs.45,000/- (as 5% bonus on Rs.9 Lakhs at the end of the 6th year). The net effective interest per year works out to 10.266%, which is greater than any home loan interest in todays market (8%). (f) Similarly, for an MIS account in single name, a POMIS investment of Rs.4.5 Lakhs fetched a total interest of Rs.2,77,175/- in 6 years. First 5 years a combination of MIS and RD fetched a total interest of Rs.2,18,675/- + 6th year MIS interest of Rs.36,000/- (Rs.3,000/- per month x 12 months) + Rs.22,500/- (as 5% bonus on Rs.4.5 Lakhs at the end of the 6th year). The net effective interest per year still works out to 10.266%. NSC(a) Investment limits = Min: Rs.100 Max: No Limit, Interest Rate = 8.16% per annum compounded half yearly, maturity period = 6 years.

(iv)

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(b) Similar to a Fixed Deposit of a bank. Certificate in denomination of Rs. 100, Rs.500, Rs. 1000, Rs.5000 & Rs. 10,000 may be purchased from any post office, either directly or through authorised agents. In addition to cash, locally executed cheque, pay order or demand draft in favour of the Post Master are also accepted. (v) KVP(a) Investment limits = Min: Rs.100 Max: No Limit, Money doubles in 8 years and 7 months. (b) Certificates are available in denominations of Rs.100/-, Rs.500/-, Rs 1,000/-, Rs 5,000/-, Rs 10,000/- and Rs.50,000/-. There is no maximum limit on the purchase of certificate. SCSS- (For Post Office, Senior Citizen is a person of over 60 years of age): (a) Investment limits = Min: Rs.1,000/-, Max: Rs.15,00,000/-per First Person in a joint account. Explanation: Husband and wife are both above the age of 60 yrs. Husband opens SCSS joint account with wife as second name and he invests the max. limit of Rs. 15 Lakhs. Then, a second joint account with the wifes first name and the husbands second name may be opened and another maximum limit of Rs.15 Lakhs may be invested in this second account too!! (b) Rate of Interest = 9% per annum. Interest payable Quarterly basis - from the date of deposit to 31st march - 30th June - 30th September - 31st December (c) Maturity Period = 5 years (May be extended for another 3 years on the option of depositor). (d) Account can be closed after one year and before second year. The amount equal to 1.5% on the balance amount will be deducted and balance will be paid to depositor. If the account is closed after 2 years from the date of opening of account, then the amount equal to 1% on the balance amount will be deducted and balance will be paid. (vii) For latest rates and updates, and other information, the following sites may be visited: http://www.tnsmallsavings.com/schemedttot.htm http://smallsavings.aponline.gov.in/index.htm

(vi)

A FEW IMPORTANT CONCLUDING NOTES: 1. Except for PPF accounts, ALL OTHER INVESTMENTS INTEREST RECEIVED IS TAXABLE and is supposed to be declared in annual income tax. 2. Although this paper does not go beyond the scope of monetary investments, it is my personal opinion and strong advice that the first and foremost goal for a person who does not have a flat or house to his/her own name MUST get an apartment or house of his/her own, on their own name (and not that of the spouses / parents / childrens name) BEFORE they start these investments. An empty plot of land

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without a house is not to be considered as security, for the scope of this paper. A Place of Shelter on ones OWN NAME is a security unmatched by any other. 3. The Last Will and Testament (Will) is the most important document that any investor makes in their entire lifetime. (i) It ensures that all the worldly possessions of the investor are allocated as per his/her desires. Worldly possessions include e-mail i.ds, passwords, online accounts (both financial and nonfinancial in nature) and other such cyber-property. (ii) It also ensures that no dispute can arise against nominees by relatives or other persons of interest. (please refer to the e-mail extract given in point no.(viii)below, regarding Will & Nominations). (iii) It overrides all other documents EXCEPT another will of the same person made at a later date. (iv) The Will may be registered with the Registrar of Births, Deaths and Marriages in the Investors locality. (v) For very high value investors, some legal representatives also advise video-graphing of the will being signed and handing over the video-graph copy to the Executor of the will. The Executor is a person who is responsible for carrying out the conditions of the will and ensuring that the assets / investments / properties are distributed as per the clauses of the will. An executor may or may-not be a Beneficiary. Any person who benefits or will benefit from the will is known as a Beneficiary. (vi) A slight background to the will is given below, followed by two Formats of a Will (Form-1 and Form-2 are two different formats and you may choose to use either of them, as per your requirement):

MAKING A WILL 1. The Indian Succession Act, 1925, defines a Will as the legal declaration of the intentions of the testator with respect to his property which is desired to be carried into effect after his death. 2. It is advisable that every person must make a Will. It can be made at any time in his life. It should, preferably, be made in writing. Although a Will need not be registered, it is better to do so because a registered Will cannot be altered or tampered with. In case of a registered Will, evidence of proof is always easier. A Will by its very nature is revocable. A person can revoke it, alter it or change it at any time in his life. 3. Requisites of a Will: a. Any person who is above the age of 18 and is of sound mind can make a Will. b. To be valid and effective, the Will should be the last Will of a free and capable testator. c. The testator must be fully aware of the contents of the Will and approve them and it must be his voluntary act. d. A testator must sign the testament on all pages. e. The signature of the testator must be attested by at least two witnesses who must have seen him sign, and are known to the testator well.

15 Note the following points carefully:a. It is not enough to hold the assets in joint names or make a nominee. The joint holder/nominee does not automatically get the title to ownership of your assets. The Will supersedes everything else. If one dies intestate (without making a Will), any distant relation can stake a claim on your assets and may go for litigation. It is better to appoint more than one executor. None of the executors or beneficiaries can attest the Will as witness. However, an executor can also be a beneficiary. The executor should be someone who would be willing to carry out the duty. The Will does not have to be on a stamp paper. Any plain sheet of good quality durable paper will do. Re-write your Will every 2-3 years, or after a major event in the family, like a marriage, birth or death. Include a residuary clause to distribute your future assets. Keep your Will somewhere safe and accessible, if not with the registrar. Having a practicing doctor as one of the attesting witnesses is desirable as it helps in proving that the testator was of sound mind at the time of making the Will. It is advisable to have witnesses some years younger that the testator. A witness or his or her spouse cannot be a beneficiary under the Will. A witness should not have a vested interest. ______________________________________________________________________________________________ Form 1 WILL

b.

c. d. e. f. g. h.

I, ., son of ..aged years, resident of hereby revoke all former Wills and Testamentary dispositions made by me and declare this to be my LAST WILL and TESTAMENT. I declare that I am of sound disposing mind and I am making this Will of my free will and accord without any persuasion, undue influence or coercion whatsoever. I do hereby leave, devise, bequeath and give to my wife, Mrs. aged years, all my property, movable and immovable, whatsoever, which I may be possessed of, or entitled to, at the time of my death. AND, I hereby appoint my wife, the said Mrs.. to be the sole Executor of my Will. IN WITNESS WHEREOF, I, the said. Have hereto signed at n this, the day of .20..

__________________________ (Signature)

Signed by the said as his last Will and Testament in the presence of us, present at the same time, who in his presence, and in the presence of each other, sign as Witnesses hereto.

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2. (With full names and addresses) Form 2 WILL This is the last Will of Sri. s/o Made this day. Voluntarily and while in sound state of mind. And whereas I am possessed of movable and immovable properties, more particularly described in the Schedule hereto, which are my self-acquired properties, and which are acquired without any detriment to the ancestral property, or the family funds, and I have the absolute powers of disposal over the same. And whereas I am anxious to make necessary arrangement in respect of the enjoyment of my properties after my lifetime, so that unnecessary misunderstanding between the members of my family may be avoided. Therefore, I am executing this last Will and Testament of mine, of my own free will, voluntarily, without any compulsion or pressure of any person, and with a sound disposing mind, and declare as follows: I hereby revoke all former Wills and Codicils made by me at any time heretofore. I have my wife, . daughters and sons. I bequeath the property described as Item No.1, in the Schedule hereto, to my wife, Smtabsolutely, to be held and enjoyed by her, with full and absolute power of alienation. I bequeath the property described as Item No.2, in the Schedule hereto, to my son, Sri..absolutely, to be held and enjoyed by her with full and absolute power of alienation. I bequeath the property described as Item No.3, in the Schedule hereto, to my daughter Ms..absolutely, to be held and enjoyed by her with full and absolute power of alienation. In respect of all financial properties having Nominations, I bequeath such properties to the respective Nominees absolutely, to be held and enjoyed by them with full and absolute power of alienation. Scheduled Property: 1) 2) 3) 4)

17 I hereby appoint my wife, the said Smt to be the sole Executor of this, my Will.

IN WITNESS WHEREOF, I, the said. Have hereto signed at n this, the day of .20.. __________________________ (Signature)

Signed by the said as his last Will and Testament in the presence of us, present at the same time, who in his presence, and in the presence o each other, sign as Witnesses hereto.

2. (With full names and addresses) _____________________________________________________________________________________________________

(vii)

Alternately, some free templates may be found on: http://www.free-legal-document.com/index.html but these may need extensive modification as per individual requirements.

(viii)

THE IMPORTANCE OF NOMINATION & WILL Will your Nominee get the money on your death?- Legality Will your Nominee get the money on your death? Did you think that your nominee is the person, who will get all the money legally from your Life Insurance Policy and Mutual funds investments? Ha! That is exactly what youd think if you arent aware of the legal aspects. We assume a lot of things which sounds like theyre obvious, but are not true from the legal point of view. Today, well concentrate on nominations in financial products. For whom are we earning? For whom are we investing? Who, do we want to leave all our wealth to, in case something happens to us? It might be your children, your spouse, parents, siblings etc., or just a subset of these. You also might want to exclude some people from your list of beneficiaries! So you think you will nominate person X in your Insurance policy, and when you are dead and

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gone, all the money goes to person X and he/she becomes the sole owner? Youre wrong, my friend! It doesnt work that way. Lets see how it actually does! What is a nominee? According to law, a nominee is a trustee not the owner of the assets. In other words, he is only a caretaker of your assets. The nominee will only hold your money/asset as a trustee and will be legally bound to transfer it to the legal heirs. For most investments, a legal heir is entitled to the deceaseds assets. For instance, Section 39 of the Insurance Act says the appointed nominee will be paid, though he may not be the legal heir. The nominee, in turn, is supposed to hold the proceeds in trust and the legal heir can claim the money. A legal heir will be the one whose is mentioned in the will. However, if a will is not made, then the legal heirs of the assets are decided according to the succession laws, where the structure is predefined on who gets how much. For example, if a man during his lifetime executes a will and in the will, he mentions his wife and children as legal heirs, then after his death, his wife and children are the legal owners of his assets. It is essential that one needs to execute a will. It is the ultimate source of truth and replaces the succession law. Nominee can also be one of the legal heirs. Important. Mention the Full Name, Address, age, relationship to yourself of the nominee. Do not write the nomination in favour of wife and children as a class. Give their specific names and particulars existing at that moment. If the nominee is a minor, appoint a person who is a major as an appointee giving his full name, age, address and relationship to the nominee. Why is the concept of nominee? So you might be wondering, if the nominee does not become the sole owner, why does such a concept of nominee exist at all? Its pretty simple. When you die, you want to make sure that the Insurance company, Mutual fund or your shares should at least get out of the companies and go to someone you trust, and who can further help, in process of passing it to your legal heirs. Otherwise, if a person dies and hasnt nominated anyone, your legal heirs will have to go through the process of producing all kind of certificates like death certificates, proof of relation etc., not to mention that the whole process is really cumbersome! (For each legal entity! The insurance company, the mutual funds, for the shares, for the real estate..) . So, to simplify, if a nominee exists, these hassles dont happen, since the company is bound to transfer all your money or assets to the nominee. The company the goes out of scene & then, its between nominee and legal heirs. Example of Nomination Ajay was 58 years old who died recently in an accident. As his children were settled, he wanted to make sure that his wife is the sole owner of all the monetary assets. This includes his insurance policy and mutual funds. So during his lifetime, he nominated his wife as a nominee in his term insurance policy and mutual funds investments. However, after Ajays death things didnt turn up the way he wanted. The reason being Ajay did not leave a will. Though his wife was the nominee in all his movable assets, as per the law, his wife, along with children, were the legal heirs and all of

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them had equal right to Ajays assets.

One simple step which could have saved the situation was that Ajay should have made a will which clearly stated that only his wife was entitled to get all the money and not his children. IMPLICATIONS OF NOMINATION ARE DIFFERENT FOR EACH CATEGORY !! Nomination in Life Insurance A policyholder can appoint multiple nominees and can also specify their shares in the policy proceeds. Nomination in life insurance has one limitation, as insurance policies are bought to secure your financial dependents, your first choice of nominee has to be your family members. In case you want to nominate a non-family member like a friend or third party, you will have to show/PROVE the insurance company that there is some insurable interest for the person. This happens because of a Clause called PRINCIPAL OF INSURABLE INTEREST in insurance. Note that provision of nomination in life insurance is related to Section 39 of the Insurance Act. Note that as per LIC website Nomination is a right conferred on the holder of a Policy of Life Assurance on his own life to appoint a person/s to receive policy moneys in the event of the policy becoming a claim by the assureds death. The Nominee does not get any other benefit except to receive the policy moneys on the death of the Life Assured. A nomination may be changed or cancelled by the life assured whenever he likes without the consent of the Nominee. Make sure, you have a nominee for your policy for easy settlement of the claim, if you do not have any nominee mentioned in the policy, it can turn out to be a disaster for your dependents to get a claim. Nomination in Mutual funds In case of mutual funds, you can nominate up to three people, who can be registered at the time of purchasing the units. While filling in the application form, there is a provision to fill in the nomination details. Even a minor can be a nominee, provided the guardian is specified in the nomination form. You can also change nomination later by filling up a form which is available on the mutual fund company website. Nomination in mutual funds is at folio level and all units in the folio will be transferred to the nominee(s). If an investor makes a further investment in the same folio, the nomination is applicable to the new units also. A non-resident Indian can be a nominee, subject to the exchange control regulations in force from time to time. Nomination in Shares Quiz for you: Now you know what a nominee means and who actually gets the money. So if there is a husband H, with wife W and nephew N, and he has nominated his nephew N to be the nominee of his shares in demat account, who will have the legal right to own the shares after husbands death? If you answer- his wife, you are wrong in this case! In case of stocks, it does not work the usual way, if a will does not exist. In the verdict, Justice Roshan Dalvi struck down a petition filed by Harsha Nitin Kokate, who was seeking permission to sell some shares held by her late husband. The Court noted

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that as she was not the nominee, she had no ownership rights over the shares. Ms Kokates lawyer had argued that as she was the heir of her husband who had died intestate (without a will), she should have ownership rights of the shares, and be able to do anything with them as she wished. In this case, Ms Kokates husband had nominated his nephew in favour of the shares. Justice Dalvi however noted that under the provisions of the Companies Act and the Depositories Act, Acts which govern the transfer of shares, the role of a nominee was different.A reading of Section 109(A) of the Companies Act and 9.11 of the Depositories Act makes it abundantly clear that the intent of the nomination is to vest the property in the shares which includes the ownership rights thereunder in the nominee upon nomination validly made as per the procedure prescribed, as has been done in this case. It means that if you have not written a will, anyone who has been nominated by you for your shares will be the ultimate owner of those stocks, The succession laws on inheritance will not be applicable but in case, you have made a will, that will be the source of truth. Nomination in PPF Let me give you a small shock first. If you have Rs 10 lakh in your public provident fund (PPF) account and you have not nominated anyone for your PPF account, your legal heirs will get maximum of Rs1 lakh only! Yes, its so important to have a nominee, now you get it. You can nominate one or more persons as nominee in PPF. Form F can be used to change or cancel a nomination for PPF. Also note that you cannot nominate anyone if you open an account for a minor. Nomination in Saving/Current/FD/RD Account in Banks FDs also come with nomination facility. While opening a new account, there is a column for nomination in the same form and you should fill it. You can nominate two persons with first and second option. Note that in-case you have not done any nomination till now, you should request for Form No DA-1 from your Bank which is used to assign a nominee in future. (Examples of ICICI Bank, HDFC Bank, Canara Bank). In the same way, to change/cancel the nomination you need to fill up Form no DA-2. Now, a small Read about Corporate Fixed Deposits As per a famous case, A Bench of Justices Aftab Alam and R M Lodha, in an order, said that the money lying deposited in the account of the original depositor should be distributed among the claimants in accordance with the Succession Act of the respective community and the nominee cannot claim any absolute right over it. Which means the Legal Heirs (and not the nominee) have a right to the money. This also means- a lengthy court-case for settlement, in case of a dispute! Section 5ZA(2)(Banking Regulation Act) merely put the nominee in the shoes of the depositor after his death and clothes him with the exclusive right to receive the money lying in the account. It gives him all the rights of the depositors so far as the depositorss account is concerned. But it by no stretch of imagination make the nominee the owner of the money. MAKE A WILL! DO YOUR NEXT KIN A HUGE FAVOUR ! MAKE SURE YOU UNDERSTAND THE IMPLICATIONS OF LAWS.