Shariah Compliant ULIP / Insurance / Pension Funds in India: Are they really Islamic?

I never felt the need to write an article related to ULIP or Insurance/ Pension Funds being Islamic. I thought it was clear. But it seems there have been some funds launched with the ethical/pure tag and labelling them shariah compliant.

This article is specific to Shariah based Insurance funds. For other insurance discussion, please refer these posts:
Is Life Insurance Halal in India
Is LIC policy Halal or Haram


Let me list all these fund first:

1. Bajaj Allianz Pure Stock Fund
2. Bajaj Allianz Pure Equity Fund
3. Bajaj Allianz Pure Stock Pension Plan
4. Tata AIA Life Select Equity Fund
5. Tata AIA Life Future Select Equity Fund

Bajaj Allianz Funds:

Straight from Bajaj Allianz policy document, we get this:

Pure Stock Fund: (SFIN: ULIF02721/07/06PURESTKFUN116) 

The investment objective of this fund is to specifically exclude companies dealing in gambling, contests, liquor, entertainment (films, TV etc.), hotels, banks and financial institutions. 

Portfolio Allocation: 

Equity & Equity Related Instruments: Not less than 60% 

Government treasury bills (Non-interest bearing): Not more than 40%

The equity investment is in non-haram sectors. But the stocks themselves either take interest or give interest; so nothing is mentioned about it.

Also as can be seen from the last line it can invest up to 40% in non-equity. Note that there is no such things as non-interest bearing Government Treasury bills.

Actually the word interest is hidden in case of Government Treasury bills and in many places it is written that they are non-interest bearing.

From the RBI docs, we have the definition:

a. Treasury Bills (T-bills)

1.2 Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. The return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price 

You will find it mentions "pay no interest". However those who know a little finance should be alarmed by 2 words used in the definition "money market" and "debt instrument". These 2 terms mean pure interest based investments. Let me explain:

For example, a 384 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 93, that is, at a discount of say, Rs.7 and would be redeemed at the face value of Rs.100/-.

So what it means that you invest Rs. 93 and after 384 days government will return you Rs. 100. You make a profit of Rs. 7 but that Rs. 7 is not profit as these people make you believe. That Rs. 7 is the interest the government pays you (approximately 7% interest rate for a year)

You can google for the Bajaj Allianz Pure Stock Fund and open MorningStar website. It can be seen that 

76% is invested in stocks

16% in bonds (pure interest)

7% in cash (may be in bank with interest or may not be - no details)

I am not aware if they are cleaning these profits. (If they are then there is some hope)

I don't thing I need to analyze any of the other Bajaj funds since it is clear how the investment is done.

Tata AIA:

In this cases things seem better. Investment pattern seems simple:

80% in equities

20% in cash and bank (non-interest account)

So this is definitely better. From MorningStar website it can be seen less than 2% is in cash; remaining all is in stocks. Stocks avoid all haram sectors. But the stocks do have some interest taking and some interest giving components themselves. Not sure if the Tata ULIP are cleaning this part similar to the cleaning done in Tata Ethical Mutual Fund.

How to Invest in a Halal way

This post is based on a comment made by a reader on the article:
Halal Tax Saving Investments in India
Sinan Suhel has the following strategy for halal investing (I have striked out some parts which I do not consider halal):

Assalam Walaykum, I liked this blog coming straight from heart. I am an IT and constantly researching from last 6 years on making my investment halal.
First thing. no matter what we think and what arguments we bring to prove it, no matter even the entire world agrees with it, no matter how many so called fatwa raised for personal gain, ALLAH's LAW REMAINS SAME and his JAHANNUM is bigger enough to accommodate those who rejects his AYATs (but remember ALLAH is most merciful).

Why we dont want haram money?
1. Allah forbids it
2. personally I am not a big fan of taking showers of fire in Jahannum for eternity for my afterlife
3. We dont want to raise our children with haram money and in the home that belongs to bank for next 20 years
4. The Zakat of haram money is rejected, you are not suppose to calculate haram money for Zakat because Allah does not accept it 
5. Hajj cannot be done by this money, its rejected
6. Sadka, Khairat or fi Sabilillah is not accepted by Allah from haram money

How can we expect barkaah in our children, wife and family members, who had been fed, clothed and raised from haram? 
How can we ignore the fact that the blood that flows in their veins, the muscles they developed, the beauty they have, all came from haram money?

WHAT TO DO?
Lets accept the fact that in india there are not too many options to invest in halal. But yet there are ways.
I agree with Fazeel and Imdad both and have came up with a good investment solution.
1. While investing in tax saving (haram) bonds, calculate the interest they are likely to give and give it to some needy on the same day you invest, THIS SAVES TAX
2. Never put money in FD, it going to reduce it if you know about inflation and tax on FD
3. Part your money into 4 equal parts
   A. Saving 
   B. Contingency 
   C. Invest in Shariah Good Mutual Funds/Gold 
   D. Invest in Mid Caps Fund 
4. Once you will reach the goal for savings (12 months of your expense) you will be able to put more in other parts
5. Now, once you have enough in B. and C., you can buy a land
6. Down the years you will be able to buy 5-6 plots from that you can sell 1-2 to get enough money to build the home on 1-2 plots
7. This way you will end up having home, decent investment, contingency funds and savings.

As far as investment in concern, there are some good MidCAP as well a Shariah funds you can look for: 
TATA ETHICAL FUND
Goldman Sachs CNX Nifty Shariah BeES

For non shariah funds:
BIRLA SunLife FrontLine (0% in debt but 20% in baking), so you can take out 20% of profit from banking allocation 

NEVER INVEST IN LIQUID, DEBT OR BANKING/FINANCE FUNDS.
I have done lots of research by the ilm and taufiq given by Allah, so if anyone wants any help regarding investment strategy or funds (not specific stocks), please do ask me and I will try, by Allah's guidance and mercy, to help my brother and sisters.

MAY ALLAH, THE MOST MERCIFUL AND THE MOST GRACIOUS, GUIDE US AND PROTECT US

Halal Ways of Investment in Gold: Coin, ETF, Bonds or Futures ?

Halal Gold Investments

Gold in undoubtedly one of the best investment options for Muslims. However, there are at least several different ways I can think of investing in gold.
Let us discuss each of them so that we know the halal from the haram.

Only option #1 and #2 are permitted, so we will discuss them first.

1. Jewellery

Probably the most common and unintentional investment that people have been making since ages. Actually given the attachment of most women to gold, I think this is probably never an investment since it can never be sold. It can at max be converted from one ornament to another.
As an investment this is a very bad option. Jewelers in India adopt several unfair practices in selling jewellery all of which result in you losing out:

• When you're buying there can be some short measure in weight of gold. Most common way is presence of artificial diamonds and stones.
• Jeweler will take making charges which are huge 10-30% of the value. So even if your gold appreciates by 20%, you earn nothing.
• While selling also there will be some short charge and you will be at loss.
• In the name of Hallmark certified jewellery, you will be charged more than normal.
• Ordinarily too you might never get jewellery at market rate.
• You can be deceived as to whether its 22 carat or 20 carat.

However this is a halal mean so you should use it.

2. Pure Gold (coins/ biscuits)

Best way for investment purpose. No problems related to rates/ purity/ weight or any other charges. No issues in selling either since buying/ selling is at near market rate. And good thing is it can be purchased quite easily. I think banks charge a little more so better to buy from jewellers itself.


 

Non-Halal Gold Investments

Now these two are the only legal ones. And these are probably the best too...even though hundreds of blogs and articles will say otherwise. Those newspaper articles and blogs are more of an advertisement front for the gold investment companies to earn money.
Disadvantages:

• Tax deduction: All below schemes will deduct tax on profit earned at rate of 20%.
• All below will cut something like 2% to 5% owing to maintenance fees or administrative charge or something else. Some of it will be recurring.
• They are illegal according to Islamic rules.

Why they are not legal: It is because of one simple aspect that by Islamic law, we have to take the possession of goods once we have paid for it - gold in this case. While the whole point of these things is mostly not keeping physical gold. In most of below schemes there is no such arrangement. And even if the arrangement exists it is either namesake or after a long duration. Hence forbidden.

3. Gold ETF (Exchange Traded Funds)

They are a way to invest in gold storing them in electronic form with the ease of the stock market. Means they are financial products which invest entirely in physical gold. Investors having demat account can buy and sell them similar to any other stocks on the exchange. You cannot get physical gold for the stock even though the company is buying it. All major MF players will have one.
 

4. Gold Mutual Fund

There are no pure Gold Mutual Funds in India, we only have the variants as mentioned in points #5 and #6.

5. Gold Saving Fund (Fund of Funds) 

They are mutual funds that invest almost entirely in Gold ETF. They are worst off then gold ETF due to additional charges for managing it. Only thing is you can invest without demat. All major MF players will have one fund which will be linked to their own ETF.

6. International Commodities Sectoral Funds 

They are mutual funds that invest overseas in gold and in shares of gold mining/ trading companies. Mostly they invest in gold related companies rather than in gold.

7. eGold

e-Gold was launched from the exchange NSEL Its very much like Gold ETF , where you can invest in Gold in online format. For investing in E-Gold you still need a demat account with one of the companies authorised by NSEL The difference from ETF is that you can also take physical delivery of gold with some terms and conditions. It is no longer available now since it was closed down due to some regulator issues.

8. Gold Futures (Commodities market)

This is an entirely betting market where you bet on the future price of a commodity right now. People may argue that futures are for hedging but that is theory...its 100% gambling.

9. Gold Investment/ Deposit Schemes

These are mostly started by jewelers in which you invest some fixed amount every month and after few years take physical delivery of the gold.
Some other financial companies also offer similar schemes.

10. Gold Government Bonds

These are similar to gold funds but better in the sense they are from a more secure institution plus these funds also give interest. So what you earn is the price of gold and the interest fixed by government. However, these are yet to be launched and details are awaited.

11. Gold Monetization Scheme

This is also a scheme soon to be launched by the government. It is exactly similar to Gold Deposit scheme with the difference that gold will be deposited with the banks and you will earn interest on it.

Halal Investments (Non-Tax Saving)

I have already discussed about Halal Tax Saving:

• Halal Tax Saving Investments 
• Halal Tax Saving Without Investments

Following investments are not related to tax saving but general investments I can think.
Please comment and add your suggestions so that I can update this blog article with your help.

1. Gold

Probably one of the easiest and safe investments. Steady increase in value and invest in small amounts.
Update: Added an article in detail.
Halal Ways to Invest in Gold

2. Real Estate

Now I am not talking about taking a house in a city. That is out of question for most of us who won't take loans. Am talking of taking in your native village. Cost of land/ shops/ houses has been rising all over India. So you could buy it in your village too as it will be affordable. Mind you that buy only in a place you are well known about and not some unknown place.

1. Agricultural/ Non-Agricultural land
2. Village House
3. Shop if major road passes through village.

3. Livestock

If you live in village and can get people for the same, having your own livestock can be a good investment.

4. Business of a trusted relative/ friend.

Probably the best way of investment. Note however the person should be a well-trusted and hard working one. And the share of business and terms be decided before hand.
If the business venture makes profit, you get your share. If it makes a loss, you do make a loss.
But this is undoubtedly the best way.

Halal Tax Saving by House Rent or HRA

There are certain legal conditions to be met before you can claim HRA deduction/ exemption. I have tried to make it as simple as possible.

But first discuss housing aspect:

1. You or your spouse or your minor child do not own a house. Even if your parents own a house, HRA can be claimed by giving them the rent and which will be part of parent’s income.
2. You own a house in one place and do not live there but live in a different place.
3. You have bought a house but have no possession yet.
4. You have rent receipts or legal agreement for the same.

I have not included home loan conditions above, since I assume a Muslim won’t be taking one.

For HRA to work there are 2 options:

     A.      You receive HRA component in your salary: Section 10 (13A) exemption

     B.      Your don’t receive HRA component or are self-employed: Section 80GG deduction

You can use either of these options, not both.

Basic Definitions used in calculations

Financial Year: A year starting from April 1 of one year and ending at March 31 of next year.

Basic Salary:      Basic component + any Dearness Allowance + any Fixed Commission

Total Income:   Entire amount earned during year minus all tax deductions and exemptions. Amount earned need not be just salary. But any additional perks or income from other sources or financial instruments. Basically just about anything that contributes wealth to your kitty. All tax deductions and tax saving exemptions need to be subtracted except the Section 80GG one for rent.

Section 10 (13A): HRA component in salary.

This is simple enough and is discussed on several sites. The amount of exemption available for a financial year is minimum of the following:

1.       HRA received in salary.

2.       Rent paid minus 10% of Basic Salary.

3.       50% of Basic Salary received for Mumbai, Delhi, Chennai, Kolkata or 40% of Basic for other places.

Section 80GG: No HRA component.

This is minimum of the following for a financial year:

1.       Rs. 24000 (in case deduction is for less than a year, calculate at Rs. 2000 per month).

2.       Rent paid minus 10% of Total Income.

3.       25% of Total Income.

Also in this case an additional Form 10BA has to be furnished. Note here for almost everyone the amount comes to first option only because nowadays, anyone would be a paying a rent of more than Rs. 2000 per month.

Example:

A person living in Delhi receives following:

Basic Salary:      Rs. 10,000 p.m. = Rs. 120,000 p.a.

Total Income:      Rs. 30,000 p.m. = Rs. 360,000 p.a.

Rent Paid:          Rs.   7,000 p.m. = Rs.   84,000 p.a.

If case is of employee getting HRA as part of Total Income,

HRA Received:    Rs.   4,000 p.m. = Rs.  48,000 p.a.

So Section 10 exemption will be minimum of:

1.       HRA received = Rs. 48,000

2.       Rent paid (Rs. 84,000) minus 10% of Basic (Rs. 12,000) = Rs. 72,000

3.       50% of Basic = Rs. 60,000

i.e. Rs. 48,000

In case no HRA, calculation as per Section 80GG:

1.       Rs. 24,000

2.       Rent paid (Rs. 84,000) minus 10% of Total (Rs. 36,000) = Rs. 48,000

3.       25% of Total = Rs. 120,000

So here minimum is Rs. 24,000

Hence note that receiving HRA in salary is always better since using Section 80GG only rent up to Rs. 2000 per month is covered which is extremely less amount.

Halal Tax Saving in India: Minimize your tax with no Investments

In the previous posts I discussed the status of Tax Saving Investments.
There are ways to at least minimize some impact of taxes. Here are some of them.
Will write about individual ones in detail is sometime, insha-allah. Update: Added articles of couple of topics.

Initial seven options are ones that every single salaried person can make use of; remaining are case-specific:

1. HRA (House Rent Agreement)
2. Internet and Telephone Rental
• Landline phone
• Mobile phone
• Broadband/ ADSL Internet
3. Medical Allowance
4. Insurance (maybe or may not be valid)
• Pure Life Insurance (Term Insurance)
• Self/Spouse/Children Mediclaim
• Parental Mediclaim
5. Donations to registered NGO/ Madrasas'/ Relief Funds/ Charitable Trusts.
6. Conveyance Expenses
7. LTA (Leave Travel Allowance)
8. Meal Coupons (and maybe some Gift Coupons)
9. School Fees of children.
10. Donation to political parties (I hope no one uses this one:))
11. Medical treatment for self in case of catastrophic illness/ disability.
12. Medical treatment for dependent handicapped/ disabled.

Pray for the taxes that you pay

I really mean it. Even if you adopt all of the measures am suggesting below you would certainly pay a good amount of taxes. Not to mention the huge amount of indirect taxes that everyone has to pay and there is no escape. (Indirect taxes are taxes on goods and services. So whenever you buy something it has a big chunk of tax built into it. Like say a cellphone costing 10K could have 2-4K of tax in it. So this unknown tax is actually also huge in number.)

OK back to the main point. Suppose you end up paying 50K tax in a year (not taking into account your indirect taxes). Now this is a good amount. Even your Zakat will be much less than this (unless you have inherited some good amount of wealth). 

We all know how efficient and ethical our governments are. If they allot 100 crores to a project, on an average maybe 20 crores might be used for the exact purpose; rest being pocketed for the luxuries and black money of the politicians. 

Now your hard-earned money should not go to feed such people's riches. So you should pray to Allah that the taxes paid by you end up in the good things like building school, hospitals, empowering the poor and disabled, salaries of workers, relief-work, scholarships etc.
Well, that it the only thing that we can do for the taxes we pay. 

Halal Tax Saving Investments in India

This article only discusses tax saving through investments; it doesn't discuss about other tax saving options. There are ways to reduce taxes through deductions and its discussed another article:
Halal Tax Saving

Let me get straight to the point, I feel THERE IS NO HALAL TAX SAVING INVESTMENT IN INDIA.
You can continue reading further to know the reasons for the same.
I am not even going into the stupid arguments that interest is allowed, small percentages are fine, interest in not usury, riba stands only for usury and not interest. Allah has given us brains to think and the Quran/ Sunna as a guide; every person is capable of investigating and finding out what is allowed and what is not.


Interest Based Investments

All these schemes are Interest based ones and hence obviously haram.

1. PPF  (Public Provident Fund )
2. NSC/ NSS (National Saving Scheme/ Certificate)
3. KVP (Kisan Vikas Patra)
4. SCSS (Senior Citizens Saving Scheme)
5. FD (Fixed Deposits) 
6. TD (Post Office Time Deposit)
7. Infrastructure Bonds

Insurance

Pure Life Assurance and Medical Insurance (for self and parents) maybe fine and is a good tax deduction; but it is not literally an investment. You do not get any returns directly.
Most of the insurance schemes in India are investment based and none are halal. The following popular ones have Interest components:

1. Guaranteed 
2. Highest NAV
3. Endowment
4. Balanced
5. Any of the Jeevan ****** from LIC

More details here:
Is Life Insurance Halal in India Is LIC insurance policy halal or haram

ULIP (Unit Linked Insurance Plan) These are somewhat similar to Mutual Funds and they can have Debt as well as Equity components. The Debt ones are obviously not allowed as that falls under Interest. The Equity one is also not allowed because of the following reason:

• You have no idea about which Stocks the insurance company invests the ULIP funds as they do not reveal where they have invested.
• Rest of the points are same as ELSS below.

I have discussed some "Shariah compliant Ulip" here: Shariah compliant Ulip/ Pension/ Insurance Fund

Pension Schemes

Pension Schemes can take various forms and are usually from Government, Insurance Companies and Mutual Funds. However, all these are heavily into Interest based investing and hence not allowed.

1. NPS (New Pension Scheme)
2. ULPP (Unit Linked Pension Plan)
3. Pension Fund from Insurances
4. Pension Fund from Mutual Funds

ELSS (Equity Linked Savings Scheme)

Probably the most popular among Muslims as a non-interest based investment. Unfortunately this is not halal either. They do the following haram investments

• Although they are equity based, some portion (about 10-20%) will be invested in Debt instruments.
• Usually they invest a significant portion in shares of Financial Instituitions like Banks, NBFC, etc.
• There is nothing stopping them from investing in completely haram sectors like Alcohol, Sugar, Media & Entertainment, Tobacco.
• For capital intensive sectors like Infrastructure, Power, Machinery, Oil & Gas each company has to be evaluated carefully as many are heavily into debt all the time (i.e. paying huge amount of interests)
• Cash rich companies like IT, PSU's have huge amounts of idle cash often invested in Banks/ Bonds and other short-term investments. This pays them a good amount of interest income.

Even if you ignore the last 2 points; just go through the Investment Portfolio of any ELSS Mutual Fund and you will see that nearly 30%-50% comes under haram industries.


Home Loans

If you have taken a Home loan from a Bank/ NBFC, you are surely paying interest and by Shariaah both the interest payer and receiver are equally sinful. The only way this can be made halal for tax purposes is that you take a loan from your father/ mother or some close relative with 0% interest and just show to the government that you are paying them interest.


Compulsory Investments

The following are Tax Saving Investments for salaried employees and are usually compulsory; so you do end up forcefully investing in them.

1. EPF (Employee Provident Fund)
2. Superannuation.

Since they are forced over you, you can't do anything about it. However, whenever you resign you can withdraw the same.

Conclusion

So what do you do? It's simple you pay the Tax. What else can you do? It might be haram to pay such high levels of tax, since there is no basis in religion for such high taxes and much of the money doesn't get used up in the right way. 

However, to prevent one haram that is forced upon you, it is not right to willfully commit another haram by investing in non-Shariaah way. Allah knows best.
And don't forget to read other ways of tax saving: Halal Tax Saving

Disclaimer

1. Do not claim to to be an expert either in religion or finance.
2. Most of information is based on personal research.
3. I would not agree to anything in which I have a little doubt or the heart does not agree. All finance decisions taken after some amount of research.
4. If you disagree to a point or there is some mistake, please express your views. Remaining silent would do me a lot of harm if I am wrong.

Scope

In the name of Allah the most beneficent, the most merciful.


Assalam alaykum,


I started this blog because I couldn't find easily halal finance options. I mean there are tons of sites related, but most are written with context to some Muslim country. Out here in India, though we have a large Muslim population; finance and banking based on Shari'a is non-existent. Hence it becomes difficult to apply the principles or views based on some other country.
E.g. Investing in a stock of a sugar company is surely a halal options in Saudi Arabia; but the same is not true in India because sugar industries also provide substantial raw materials to alcohol manufacturing companies.


So over the years, whatever I have learned am posting the same.


Following is the scope of this blog:

1. This blog is limited to personal finance only; not as a profession or employment.
2. Even in finance it will discuss only in relation to islamic investments.
3. Religious topics will be discussed with respect to finance only; no other religious topics.
4. All things discussed are with respect to India only.