A student loan needs a winning co-applicant as well as a guarantee

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My wife and I own shares of a reputable company. We want to sell them and invest the product in order to get a stable monthly income. Is it advisable to sell these shares? If so, what is the detailed procedure, including the tax implications, for the same? What is the best and safest investment avenue so that we can achieve a stable monthly income for life?

-V. Swaminathan

If a company’s shares are a substantial part of your portfolio, you should surely consider divesting them partially or even completely. It is good to diversify the portfolio instead of owning a stock; even though it is a reputable company as you say, you are subject to the risks that the company may hold. Capital gains on listed shares exceeding ??1 lakh during a financial year is taxable at 10% plus the surcharge and tax as the case may be. You will be eligible for the grandfather clause if you had invested before January 31, 2018 and any gain will be tax exempt.

Reinvestment of the proceeds from the sale can be made based on your risk appetite, as you need regular income; you should therefore consider a debt portfolio.

I want to take out a student loan. I have two options. The first is to use my fixed deposits and use an overdraft on them. The second is the more traditional education loan on which I will be charged near a declining interest rate of 9.5%. I am leaning towards the first option, but I want to be sure that there are no caveats and tax implications.

—Name hidden on request

The key factors for you are cost of borrowing and convenience when comparing the two options i.e. ease of overdraft versus student loan. The cost of the overdraft facility is 6.5% (5.5% + 1%). And in the case of a student loan, the cost is around 9.5%. Since interest is allowed as a deduction under Section 80E of the Income Tax Act, the tax benefit will reduce the cost of borrowing. Assuming a tax rate of 30%, the net cost of borrowing is 6.65%. In the event that the two are more or less equal then you must see the convenience. A student loan needs a paid co-applicant as well as a guarantee over an overdraft facility, which is easier in this process and does not require a co-applicant.

Surya Bhatia is Managing Partner of Asset Managers.

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