Financial Planning is something which most people in India are ignoring. They realise the importance of this when they are already late. All of us should start financial planning at an early age. We are here ont only to discuss new invest or to do something new, but also to do some things in a more mature and intelligent way. We will discuss here some ways which all of us must know and use. These tips will not necessarily ask you to invest more, these will just educate you about some smart ways to invest. Some of the tips will make a very less difference in the result, but no harm in implementing even if there is a small difference.
1. FMP vs FD (Fixed Maturity Plans vs Fixed Deposits)
The maturity amount of a fixed deposit in a bank is 'guaranteed', but only 'indicated' in the FMP of a mutual fund. The regulator does not allow fund companies to guarantee returns, and hence the 'indicated returns' in FMPs.
These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.
For one year FMP, the tax works out to 10% without indexation and 20% with indexation. Indexation benefits for Fixed maturity plans are high, since the inflation rates are high, as a result, you may have to pay very little tax for a FMP
For example, if you invest Rs 1,00,000 for a one year FMP, and assume the Fixed maturity plan gives you a gain of 10%- approximate Rs 10000. The capital gains tax for the Fixed Maturity Plan works out to be Rs 1000 without indexation and 1250 with indexation. However, even at a conservative inflation rate of 8%, the tax with indexation applied on the Rs 1250 capital gains tax is practically nil.
Under the current regime – you can even take advantage of double indexation benefit for calculating long term capital gains if a FMP is issued such that it is issued in say March 2011, and redeemed in April 2012: 13 months in all but they are spread over 2 financial years.
2. Buying a life insurance policy
We all know that best time to buy such policies is as soon as possible but we usually do not do it. However, we all miss one tricky catch here. Say I am 26 years of age and I do not want to purchase a policy for next few years. I am planning to purchase in 4-6 years. What is the best time to buy it and also delay it(I know I should ask anyone to delay life insurance, but suppose you have decided to delay it)? You should purchase it before you are 31 years old. Reason: The premiums increase with age, we all know. But premiums usually increase drastically when age crosses multiples of 5 of 10 years. Here till you 30, primium will be comparatively less, but after that it will increase suddenly. Then, till 35 or 40 years, premium will not increase much but after that, it will agian increase. So, don't miss if you are at the edge of coming in next slab.
3. Best duration of buying a LIC Policy
We all know that more the duration, higher are the bonuses. But we do not want to block money for 20 years or even for 15 years. We decided to purchase a policy for 10 years. Sad, this is one of those worst duration for which you can purchase a policy. Why not just increase it by 1 year(and not 5 or 10 years), make it for 11 years and enter the next slab for bonus that you will get for all 11 years. This is a very intelligent trick but most LIC agents do not suggest this, not usre what the reason is.
4. Saving Plus Accounts
Say I have a savings account with State Bank of India. It gives me 3 or 3.5% interest in which I have Rs. 1,00,000. I also have a fixed deposit of Rs. 25000 for 2 years. We do not want to make FD of 1 lacs rupees as we might need it anytime. Why not use the facility of SBI Savings Plus account in which money automatically gets transfer to FD and it can be withdrawn at any time in the normal manner in which I withdraw from the savings account. This is only an one time effort, a visit to your branch, where you need to request them to convert SBI savings account to Savings Plus account and rest all is automatic forever. This is also known as MOD facility and is being provided by other banks also like ICICI, HDFC and few others. This is a not to be missed tips.
More tips to come in coming days. If you like these tips, please comment and join/follow the blog to keepo yourself updated of more tips. If you have any questions regarding these tips or other such investments, feel free to ask and I will try my best to answer you to the best of my knowledge.
5. Public Provident Fund
PPF is a long term investment and many people think that this being such long term is like blocking the money. But, the best part of this investment is that you are not bound with any amount that you need to invest per year. You can invest a minimum of Rs. 500 and a maximum of Rs 1,00,000 per year. Any financial adviser would definitely suggest this investment to everyone. You can invest more amount when you have and just Rs. 500 in any financial year if you do not have surplus money to invest. In addition the investment being tax free, even the interest earned(8.6% p.a.) on PPF on tax free. If you have kids, you should definitely go for PPF and can save some money when kids will grow up.
6. Term Insurance
Anyone who is a earning member and has dependents should have a term insurance. Though, ideal amount is calculated in various ways, you should atleast start with whatever you can afford. Term Insurance are much cheaper than other insurance as you never get your money back. But this is a step that you take nit as investment but as security of your dependents just in case of some unfortunate event.
7. Tax Saving when HRA is received
8. Tax saving if no HRA is received
For salaried employees, in some cases, total pay is fixed or lump sum and no salary breakup is provided. This is very common in jobs in schools/colleges or other small private organizations. In these cases you can not show your actual rent for tax exemption. However, The least of the following could be claimed under Section 80GG.
The maturity amount of a fixed deposit in a bank is 'guaranteed', but only 'indicated' in the FMP of a mutual fund. The regulator does not allow fund companies to guarantee returns, and hence the 'indicated returns' in FMPs.
These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.
For one year FMP, the tax works out to 10% without indexation and 20% with indexation. Indexation benefits for Fixed maturity plans are high, since the inflation rates are high, as a result, you may have to pay very little tax for a FMP
For example, if you invest Rs 1,00,000 for a one year FMP, and assume the Fixed maturity plan gives you a gain of 10%- approximate Rs 10000. The capital gains tax for the Fixed Maturity Plan works out to be Rs 1000 without indexation and 1250 with indexation. However, even at a conservative inflation rate of 8%, the tax with indexation applied on the Rs 1250 capital gains tax is practically nil.
We all know that best time to buy such policies is as soon as possible but we usually do not do it. However, we all miss one tricky catch here. Say I am 26 years of age and I do not want to purchase a policy for next few years. I am planning to purchase in 4-6 years. What is the best time to buy it and also delay it(I know I should ask anyone to delay life insurance, but suppose you have decided to delay it)? You should purchase it before you are 31 years old. Reason: The premiums increase with age, we all know. But premiums usually increase drastically when age crosses multiples of 5 of 10 years. Here till you 30, primium will be comparatively less, but after that it will increase suddenly. Then, till 35 or 40 years, premium will not increase much but after that, it will agian increase. So, don't miss if you are at the edge of coming in next slab.
We all know that more the duration, higher are the bonuses. But we do not want to block money for 20 years or even for 15 years. We decided to purchase a policy for 10 years. Sad, this is one of those worst duration for which you can purchase a policy. Why not just increase it by 1 year(and not 5 or 10 years), make it for 11 years and enter the next slab for bonus that you will get for all 11 years. This is a very intelligent trick but most LIC agents do not suggest this, not usre what the reason is.
Say I have a savings account with State Bank of India. It gives me 3 or 3.5% interest in which I have Rs. 1,00,000. I also have a fixed deposit of Rs. 25000 for 2 years. We do not want to make FD of 1 lacs rupees as we might need it anytime. Why not use the facility of SBI Savings Plus account in which money automatically gets transfer to FD and it can be withdrawn at any time in the normal manner in which I withdraw from the savings account. This is only an one time effort, a visit to your branch, where you need to request them to convert SBI savings account to Savings Plus account and rest all is automatic forever. This is also known as MOD facility and is being provided by other banks also like ICICI, HDFC and few others. This is a not to be missed tips.
PPF is a long term investment and many people think that this being such long term is like blocking the money. But, the best part of this investment is that you are not bound with any amount that you need to invest per year. You can invest a minimum of Rs. 500 and a maximum of Rs 1,00,000 per year. Any financial adviser would definitely suggest this investment to everyone. You can invest more amount when you have and just Rs. 500 in any financial year if you do not have surplus money to invest. In addition the investment being tax free, even the interest earned(8.6% p.a.) on PPF on tax free. If you have kids, you should definitely go for PPF and can save some money when kids will grow up.
Anyone who is a earning member and has dependents should have a term insurance. Though, ideal amount is calculated in various ways, you should atleast start with whatever you can afford. Term Insurance are much cheaper than other insurance as you never get your money back. But this is a step that you take nit as investment but as security of your dependents just in case of some unfortunate event.
7. Tax Saving when HRA is received
If HRA forms part of your salary, then the minimum of the following three is available as exemption.
- The actual HRA received from your employer
- The actual rent paid by you for the house, minus 10% of your salary (this includes basic + dearness allowance, if any)
- 50% of your basic salary (for a metro) or 40% of your basic salary (for non-metro).
8. Tax saving if no HRA is received
For salaried employees, in some cases, total pay is fixed or lump sum and no salary breakup is provided. This is very common in jobs in schools/colleges or other small private organizations. In these cases you can not show your actual rent for tax exemption. However, The least of the following could be claimed under Section 80GG.
- 25% of the total income or,
- Rs 2,000 per month or,
- Excess of rent paid over 10% of total income
This deduction will however not be allowed, if you, your spouse or minor child owns a residential accommodation in the location where you reside or perform office duties.
