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Tuesday, March 15, 2016

Some tips on Income tax

Some tips on Income tax
(Disclaimer: these are only observations. Please consult a certified financial planner for professional advice.)
(This was posted by me on whatsapp as an instantaneous reaction to someone talking about ULIP to save taxes)

One of the common mistakes many of us (ppl in 10% and 20%) brackets do is to rush and invest over a few "tax saving" instruments without much thought. I am just listing a few things you should seriously consider.

Please note the two most important advices i have received:

Paying tax is better than wasting money on a bad financial instrument.
(For 10% bracket, you pay atmost 25000 rs. For 20% brakect, that is atmost 75k rs)

You should not put money anywhere unless you know all risks(even bank FD has risk), and you have a need for putting money there.

Real option for ppl like us:
1. Best option: get a home loan.
Principal part of home loan comes under section (u/s) 80. Upto 1.5 lakhs limit as of now.
Interest comes u/s 24. For home loans that we can afford, all interest is deductible.

You must get bank certificate in which they will clearly say the principal and loan part.

A decent home loan should cover most of your tax related needs.

Do not forget to insure the loan. The banks will add a small premium, but its worth spending.
(Personal exp: my home loan was in name of me and my father. When my father passed away, i could have got insurance co to pay rest of 6 lakh premium if i had insured by paying 300rs more a year)

LIC term loans:
These are low ticket. If you dont have it, you must get this.
While picking a term plan:
Sum Assured should be at least 30-50 lakhs based on your needs.
Eg: if total monthly family expenditure is 32,000, SA should be atleast for
50 lakhs.
(For a 40 yr old, taking 25 yr term for 50L, premium is about 3500 rs)
 i name only LIC bcoz they are the biggest term insurer. In insurance business, the best one has most customers.

Health Insurance:
A must.
Atleast get the health insurance from Vijaya Bank.
This is one investment where you can put money on one or more insurer.
For the second insurer, go for a health insurance player like Max Bupa, etc. All the good ones are private. Ask your nearby hospital about the insurers that provide cashless facility there. Then only buy. Always prefer family floater(only bachelors need to fall back on individual plan)
IMPORTANT: there is something called "top-up" plan in health insurance. The way this works: we pay money for all expenses beyond a limit, send the bill to insurer and get money refunded.
If you have a base plan of 3L and you then go for a topup of 5L with a base of 2L; and god forbid something happened to you requiring a 6L surgery; your base plan can initially cover the 1st 3L. The remaining 3L has to be paid by you to hospital. The bill of this amount should be sent for processing claim in the topup plan. Money will be refunded by them. You can actually show the 6L bill, and ask for topup ppl to pay you 4L rs. You can then give 1L back to base plan.
Point to note: topup plan pays only those bills that cross the base limit.

And, due to this condition(only pay if a base is crossed and no cashless facility), they are going to be much cheaper.

4. PPF
If you dont have, please get one. This is the extra pension that you are saving up. Make sure you put at least 1000 rs in this.

Optionals based on need:
Rest of money should be put based on your age.
I am just listing some of the ones that make sense for ppl earning less than 10L.

Please note: asset allocation is crucial.
(Even though it wont save tax, do your usual gold purchase, bank FDs, etc)

(Important point: when i say risk, it only means that the earnings may not be best. You are going to lose money only when you do emergency sale. In emergency, there will be slight loss in everything.)

A) 5yr Bank FD: prefer putting this in 50,000 or 1L.
Lock in period is 5 yrs. If there is an emergency, you might end up breaking this.
Ideally, start a basic 5yr FD every year.
Risk: interest rate risk.

B) NSS, KVP etc.
Interest rate risk. Policy risk. Put money only if family compulsion is there.

Dont put money in the rest if you dont have atleast 1L in bank FDs(regular and 5yr ones)

ULIP: generally discouraged by people.
Use this with full money on equity. If you are joining, go for atleast 20yrs.
Market risk.
Important: do not put debt component in ULIP if you already have liquid cash of 3L(spread in banks, including short FDs, gold)

General rule of thumb:
You can put upto 100-Age% of your free money on equity.
Ex: for a 35 yo, upto 65% of investment can be in equity.
If you are 25 yo and earn 40k per month, and you spend 20,000 for household expenditure, 10,000 for personal spend+emergency kitty; you only have 10,000 to play with. At 25yrs, you can put upto 100-25=75% of this 10,000, ie, upto 7500 in equity. If you have a ULIP of 1000 per month, NPS with equity of 3k per year(equiv of 250/month), you can only put upto about 6000 on equity. For this person, i wont recommend anything more than 5k per month as SIP.

ELSS must be invested only as SIP. You may topup when you get unexpected money.

Important point with ELSS or any equity: benefits accrue only on very long term. You are holding for 15-20years or even upto your death.
ELSS makes money bcoz money is invested in top 500 cos in market. On an average, they will aim to make at least 10% operating margin over long term(10 yr time horizon). No matter how market reacts, these companies have to maintain a steady course bcoz owners get to eat kanji only if co make profit. Over any 15 yr period, equity will give returns of 10%.
Someone who started putting money from 1999 in ELSS would have made 17-24% over the 17 yr period(ELSS started in 99)

There are lots more. Its better to pay tax than invest on them(i would not have said KVP and NSS as well if i hadnt seen an attachment for it among baniyas)

For realistic advice on tax investments, read Monika Halan, editor of money section livemint.

Its wiser to lose a few thousand on tax than a few lakhs later on.

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