With zeal I filled in my Investment Plans for the year in the month of April last year, gleaming at the extra bucks that would come “In hand” every month. The “Plans” readily accepted by the HR Department and duly complied with in my monthly take home! In my zeal to meticulously spend those extra bucks, I conveniently forget that those plans need to be put in action. In January, the HR department suddenly comes back with the ominous “Now! Show me Proof!” messages and, “Being Proactive with my tax planning” makes a come back to the top of my Resolution lists for the year. The risk of non-complying means a reduced Cash Flow, in Jan to March, the price (read tax liability) to be paid for not executing the Plan.
Investments for me mean “Plan thorough”, but with the sword of deadlines hanging down your neck, and each day approaching, Quick and Dirty is all I am hoping to manage. When you are in this dilemma, the Finance Guys (read Insurance companies, Agents, Brokers) are omnipresent. I wonder how they know I need 80 C investment proofs and I need them now!
Here is a ready reckoner on how I evaluate my options:
For most of us Tax planning, means 80 C investments. The ceiling for this is Rs. 1 Lakh. For Salaried Persons, the company does some retirement planning on our behalf, which is called Employees Provident Fund (EPF), remember the component which is mandatorily cut from our monthly salaries.
This component is a part of the 80 C investing limit of Rs 1 Lakh. The first step would be to determine how much this is, and deduct that from the Rs. 1 Lakh limit. For e.g., if my EPF contribution for the year is Rs. 50,000 then I need to show investment proofs for only Rs. 50,000/- Now there are a multitude of options where I can invest this, I have picked up a select few which I am going to delve on:
Option 1: Tax Saving FDs
Fixed deposits come with one word “Assured Returns”. Both my principal and interest are protected. Now that statement is only partially true. I definitely know the exact figure that I will be getting on maturity, however, there is no guarantee that this will be enough to fight the post – inflation returns 5 years hence. Also, the lock in period is 5 years and this is a mandatory lock in period. The rate of interest approximately is 8-9% per year, and importantly compounded quarterly.
Option 2: ELSS: Tax saving Mutual Funds
These are a select section of Mutual Fund with a lock in period of 3 years and invest in Equity. The maximum benefits of these funds come through a Systematic Investment month on month, where you don’t worry about which is the right time to enter the market, rather you will spread the cost of your investment over a period of 12 months. With markets already hovering at 21000 points, and having no option for a SIP, thanks to my planning skills, the cost of opting for an ELSS, will be justified, if only I expect the markets to be higher than 25000 by the end of three years! Now if I were that smart would I have not planned it better?
Option 3: Insurance: Pension plans/ULIPS/TERM?
Pension plans, Ulips, any plans which come out of the Insurance company factory and have “market linked” associated with them and I prefer to steer clear from it. They are not bad products, but the time that I have at hand and the market being upbeat does not merit investments in these products. Also, my belief is that any investment in ULIPs holds good if I systematically invest in the same for the next 10 years or more. It is a long term commitment and a short term view of pay one premium and forget about the policy is not a judicious view.
What I am looking at in the Insurance company kitty is the pure risk “Term Plan”. Considering that I have a kid who is economically dependent on me, I need to provide for their financial protection in case of any untoward incident on my life. The policies are available at less than Rs. 8000/- for upto Rs. 1 Crore of pure term cover for a 30 year old female.
The other benefit is, I will have to pay this every year and hence this portion will be automatically counted in for my tax saving investment next year (provided I act on the numerous reminders by the insurance company for premium payments and actually pay them on time)
Option 4: Public Provident Fund
I have a PPF account with a public sector bank and to keep that account active, I need to ensure I fund it by Rs. 500 at least every year (before March 31st). Alongside, with the interest rates at 8.7%, does seem more attractive compared to a tax saving FD. Also, this will help me plan for those grey years well ahead in time since it is only after 15 years that I can close the account and/or withdraw all of the funds. However on completion of 5 years, I am allowed access to 50% of the funds.
Keeping the time I have at hand, and the factors of returns, risk, liquidity and market conditions, also the decision time that I have at hand to evaluate the various proposals and risks (I actually have no time!), here is my 80 C investment plan for the year of the Rs. 50,000/-.
A pure term plan for Rs. 8000/- which will give me a cover of about Rs. 1 Crore, this keeping in mind my Human Live Value. Given the rate of return on PPF for the year and investing the entire sum in the market at one go today, not being a prudent decision for me, I decide to go with investing Rs. 42,000 in PPF for the year. I also keep this in mind, that this is not an optimum tax planning decision, but one made with minimal risk appetite given the time. The approach being, better safe than sorry. If I had started early, would I have planned differently? Definitely Yes. In April, market linked products and investing in them systematically would have been my choice.
After all this, Don’t forget 80 D!!!!
In the 80 C fever, I completely forgot about the section 80 D which offers me a tax rebate of upto Rs. 15000 in a year for mediclaim insurance for myself, spouse and children and an additional Rs. 15000/- for parents (Rs. 20,000 if they are senior citizens)
With rising health costs, we need an individual cover of at least Rs. 5 Lakhs to battle any exigency. Another good option would be to opt for a critical illness policy along with this, not only are the premium payments applicable for a rebate under Section 80 D, but with the rising incidences of cancer, heart ailments etc., hard earned investments can be wiped off with one diagnosis. A critical illness cover will aid in planning for that risk well in advance.
This may involve some prudent time spent in researching the pros and cons in the policies. My pick would be one, where I can opt for a cashless benefit in a wider range of hospitals/nursing homes and a company with a proven claim settlement ratio.
Another important point in a mediclaim policy is that any pre-existing condition is covered by most insurers only after 4 years, hence here too investing early is a prudent choice.
About the author:Daisy Fernandes is a personal finance enthusiast who is also pursuing her Certification in Financial Planning.
Source: InvestmentYogi is one of the leading personal finance websites in India
if somebody provides ready reckoner in word or excel format in respect of income tax, wealth tax, service tax,central excise, fema and companies act it will be a great help to financial professionals