We are in the last quarter of the current financial year i.e. 2019-2020, which will end on 31/03/2020. This is the high time everyone should take a look at their tax planning and investments. In this article, I am sharing some important points and suggestions, especially for salaried individuals, who are in the initial years of their earning career.
In the initial years of one's earning career, savings and investments both are equally important and both should be started as early as possible. There are so many options available, which are advisable for beginners ranging from a simple saving bank account, FDRs, PPF to mutual funds.
Being a beginner and new to the field, you may take advice from any senior or obtain information from electronic media, print media, internet or may take help of a consultant. All these will help you to take an informed decision. But ultimately, it's your money and you will be the final decision maker of your personal finance.
We observe that sometimes people take weird financial decisions, which create a problem in their good tax planning and wealth creation in future. Some of the examples of such behavior are:
(1) People earn income, spend some of it and the excess amount remain idle in the savings bank account and people don't invest them anywhere.
(2) They delay their plan to invest in PPF (Public Provident Funds) or ELSS (Equity Linked Saving Scheme), for the sake of taking a car loan, and that too with a misconception that they will get deduction for the interest paid on that loan.
(3) They are investing all their savings in mutual funds only, with the misconception that they get tax exemption on all the money they invest in mutual funds.
(4) They just don't utilize or underutilize the amount of deduction they can claim u/s. 80C (which is at present Rs. 1,50,000/-)
Above are some common financial mistakes, that people make due to lack of information, proper guidance and clarity of the law.
Result being, they end up paying unnecessary high tax in spite of having not so high income bracket and sometimes it has adverse impact on their long term wealth creation goals, too.
Therefore, in this article, I have tried to explain the basics of tax planning and investments by putting my thoughts and suggestions in simple words, which will help you in managing your personal finance.
(1) Follow the hierarchy of investment :
• You should have at least two savings accounts, indifferent banks, and keep at least that much balance in savings accounts by which you can manage your living of 3 to 4 months, if your income stops now.
• Fixed deposits, as we all know, are comparatively less risky option of investment and therefore, in case of present scenario of falling interest rates also, one should not completely ignore it. Go for FDRs in both nationalized as well as reputed private banks. Get your FDRs renewed on maturity until you really need the funds for a purpose. This will form a strong financial base for you in the long run, so that you can divert your incremental income to a riskier option of investment which also comes with possibilities of high returns i.e. Equity.
• Along with FDRs, you can also keep a portion of your income to invest in debt mutual funds which are comparatively less risky option.
• At the same time, secured Non-Convertible Debentures (NCD) issued by companies with sound fundamentals and good track records, is also a good option. They behave like FDs with different maturity periods, different interest rates with monthly/annually interest service intervals. The rates offered by the companies on NCDs are normally higher than that on bank FDRs.
• A good portion of your savings must go to both PPF and ELSS (parallel with FDRs, if possible). You can start with a small amount and keep on increasing it, with increase in your income. Both the schemes have multiple benefits. The amount invested in PPF and ELSS is deductible for income tax purpose u/s. 80C. Moreover, interest received on PPF is (which is approximately 7.9% at present) also exempt from income tax. Last but not the least; both the schemes help you in wealth creation for your long term financial goals.
• Mutual Funds, being the indirect way to invest in equity market, are the most popular and advisable tools to take advantage of return on equity. Make sure, you stay invested for long term in Mutual Funds to get the best results. You should start investing some monthly amount through SIP route and you can go for lump sum investment also. The decision depends on your knowledge and understanding about the market. You can also take advice of a consultant, to make an informed choice of plan which best suits your income and financial goals.
(2) Make full utilization of limit available under section 80C:
Section 80C, under which you can claim a deduction up to Rs. 1,50,000/-,is a very basic tool to save your tax. One should plan to save and invest in sucha way that at least this limit does not remain underutilized, as can be seen in case of many individuals. The major components to this are known to all viz., life insurance premium, school fees, PPF, ELSS and principal amount of housing loan repaid.
Here the important point is, you should use all these components to fully utilize the limit and should not depend on one. For example, if you take a life insurance policy of unnecessary high premium just to cover the entire 1.5 lakh limit by this single tool only, it is not at all advisable planning.
(3) Clear the misconception that you will get tax deduction for all the EMI served by you:
Many salaried persons have a misconception that they get deduction of the interest paid on all type of loans from their income for income tax purpose. Actually it is not true. Only business assessees can take deduction of interest on loans borrowed and that too, which are taken for business purpose only. Salaried person cannot claim deduction of any interest paid on gold loan, vehicle loan or any personal loan. Even EMIs paid for your home appliances are also not deductible from your income. Only interest paid on housing loan and, as per the announcement in the previous budget, on loan taken to purchase electronic vehicle are deductible from income (subject to some conditions). So make sure you borrow wisely and if really in need.
(4) Don't think all your mutual fund investments are tax free:
This is another misconception. Some people start doing SIPs as per the advice of their consultant or on their own and think that they will get tax deduction for all SIPs debiting from their bank account. This is not the case. Only amount invested in specific ELSS schemes is deductible from your income for income tax purpose. Therefore, you should enquire beforehand, whether the mutual fund scheme you have chosen is tax saving or not and plan your investments accordingly.
(5) Obtain the receipts of all the donations made by you:
As we all know, donations made to certain trusts and institutions are eligible for either partial or full deduction from income tax, subject to certain conditions. You should make such donations through bank only and avoid donations in cash. The important point to note here is, you must have a receipt of the donation made which should contain the name, address and PAN of the donee as well as the section under which the donation made is exempt and up to which extent. It is a necessary proof that should be on hand at the time of tax planning and return filing.
(6) Contact your consultant well in advance:
This is something very important. Please note that investments made during the period from 1st April to 31st March will only be considered for tax calculation purpose for the relevant assessment year. That is why you should review your investments and tax planning well in advance. It is also advisable to contact your consultant / Chartered Accountant, at least once, before the end of the financial year. Reason being, if he finds any mistake in any area or has any suggestions, then you have enough time to implement it. Therefore, please show your tentative income and investment details to your consultant, at least once, before the end of the financial year.
I hope that above points will help you to take a wise and well informed financial decision about your tax planning and investments.
The author CA Hansini Y. Buch is a practicing Chartered Accountant.