For most individuals, financial planning and tax planning are two mutually exclusive exercises. While planning our investments we spend considerable amount of time evaluating various options and determining which one suits us the best.
But when it comes to planning our investments from a tax-saving perspective, more often than not, we simply go the traditional way and do the exact same thing that we did in the earlier years. Well, in case you are not aware, the guidelines governing such investments are a lot different this year. And lethargy on your part to rework your investment plan could cost you dear.
Why are the stakes higher this year? Until the previous year, tax benefit was provided as a rebate on the investment amount, which could not exceed Rs 100,000; of this Rs 30,000 was exclusively reserved for Infrastructure Bonds.
Also, the rebate reduced with every rise in the income slab; individuals earning over Rs 500,000 per year were not eligible to claim any rebate. For the current financial year, the Rs 100,000 limit has been retained; however internal caps have been done away with. Individuals have a much greater degree of flexibility in deciding how much to invest in the eligible instruments.
The other significant changes are:
- The rebate has been replaced by a deduction from gross total income, effectively. The higher your income slab, the greater is the tax benefit.
- And all individuals, irrespective of the income bracket they are in, are eligible for this investment. For most readers, these developments will result in higher tax-savings.
We at Personalfn believe that you should use this Rs 100,000 contribution as an integral part of your overall financial planning and not just for the purpose of saving tax.
You should spend time, preferably with your financial consultant, to understand which instruments and in what proportion suit your requirement best. In this note we recommend a broad asset allocation for tax saving instruments for different investor profiles.
If you are below 30 years of age:
In this age bracket, you probably have a high appetite for risk. Your disposable surplus maybe small (as you could be paying your home loan installments), but the savings that you have can be set aside for a long period of time. Your children, if any, still have many years before they go to college; or retirement is still further away.
|
Age |
Life insurance premium |
EPF |
PPF / NSC |
ELSS |
Total |
|
< 30 |
10,000 |
20,000 |
20,000 |
50,000 |
100,000 |
|
30 - 45 |
10,000 |
30,000 |
25,000 |
35,000 |
100,000 |
|
45 - 55 |
10,000 |
35,000 |
30,000 |
25,000 |
100,000 |
|
> 55 |
10,000 |
- |
65,000 |
25,000 |
100,000 |
You therefore should invest a large chunk of your surplus in tax-saving funds (equity funds). The employee provident fund deduction happens from your salary and therefore you have little control over it. Regarding life insurance, go in for pure term insurance to start with. Such policies are very affordable and can extend for up to 30 years.
The rest of your funds (net of the home loan principal repayment) can be parked in NSC/PPF (National Savings Certificates/Pubic Provident Fund).
If are between 30 and 45 years of age:
Your appetite for risk will gradually decline over this age bracket as a result of which your exposure to the stock markets will need to be adjusted accordingly. As your compensation increases, so will your contribution to the Employees Provident Fund. The life insurance component can be maintained at the same level; assuming that you would have already taken adequate life insurance and there is no need to add to it. In keeping with your reducing risk appetite, your contribution to PPF/NSC increases.
One benefit of the higher contribution to PPF will be that your account will be maturing (you probably opened an account when you started to earn) and will yield you tax free income (this can help you fund your children's college education).
If you are between 45 and 55 years of age:
You are now nearing retirement. To that extent it is critical that you fill in any shortfall that may exist in your retirement nest egg. You also do not want to jeopardise your pool of savings by taking any extraordinary risk.
The allocation will therefore continue to move away from risky assets like stocks, to safer ones line the NSC. However, it is important that you continue to allocate some money to stocks. The reason being that even at age 55, you probably have 15 to 20 years of retired life; therefore having some portion of your money invested for longer durations, in the high risk-high return category, will help in building your nest egg for the latter part of your retired life.
If you are over 55 years of age:
You are to retire in a few years; then you will have to depend on your investments for meeting your expenses. Therefore the money that you have to invest under Section 80C must be allocated in a manner that serves both near term income requirements as well as long-term growth needs. Most of the funds are therefore allocated to NSC.
Your PPF account probably will mature early into your retirement (if you started another account at about age 40 years). You continue to allocate some money to equity to provide for the latter part of your retired life.
Once you are retired however, since you will not have income there is no need to worry about Section 80C. You should consider investing in the Senior Citizens Savings Scheme, which offers an assured return of 9% pa; interest is payable quarterly. Another investment you should consider are Post Office Monthly Income Scheme.
Investing the Rs 100,000 in a manner that saves both taxes as well as helps you achieve your long-term financial objectives is not a difficult exercise. All it requires is for you to give it some thought, draw up a plan that suits you best and then be disciplined in executing the same.
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