As the financial year is going to end soon, I would like to talk about one crucial aspect of personal investment keeping in mind the income tax benefits as well as financial goals.
You must have heard one saying 'Rupee saved is Rupee earned”. I would add 'Rupee invested well is Rupee saved well”. The formula for our cash outgo (total spending) should be total earnings less total savings. So if your formula for total savings is total earnings less total spending, please change the formula. Have a target for savings and stick to that at any cost.
Let us analyze the options of Investing one by one.
1. Provident fund (PF):
The Investment in PF is one of the most famous and trusted option for Investment. I would rate the same as most essential too. The Idea behind PF Investment is to have enough money for life after retirement. You also should invest in it keeping that idea in mind. This has to be there in your investment portfolio without excuse. This is one of the safest investment and one of the most tax beneficial tools too.
If you are employed, you will have either PF set up by your employer (RPF) or PF with government directly. If you are entrepreneur, you may go for PPF.
2. Fixed Deposits:
The Investment in FD is one of the most liquid assets. You can break it anytime without the loss of capital.
You have to estimate an amount which you require in case of any contingency like illness, accident, death, etc. Keeping that in mind, please spare the amount and make FD of the same. The FD so created should never be touched upon for any other purpose. Let me explain you why? Suppose you come across any contingency and you don't have money, Will you go for personal loan? That would be too costly and will make a big hole in your pocket for years to come.
It is also one of the most essential short term investments which you can link with your short term goals. Like, if you want to buy something after 6/12 months and you have that amount with you right now, book an FD for that same period. This way you can earn interest and be assured about availability of funds at the same time. Generally, the human tendency is that the amount kept in savings account gets expended easily. This idea will not let it happen.
If you want to have 80C deduction under Income Tax, you may go for 5 years FD with banks/Post office. The interest on FD is taxable for all including senior citizens subject to 80TTB limits.
You may invest in FD with NBFCs. They offer better rates than banks. Please go for NBFCs with highly reputed promoters. Don't fall into trap by just looking at the FD rates.
3. Life Insurance Term Plan:
You may think Term Plan is expenditure and not an Investment, As it doesn't provide maturity/surrender benefits. But I would say there are certain expenditures which ultimately saves lot of money. Hence, they are actually an investment. So, KUCH EXPENDITURE ACCHE HOTE HAI.
Now, why term plan? If you are the bread earner of the family, you have to have term plan. Reason being, the survival of the family after losing you (in case of mishappening) will be disastrous. Why not any other insurance plan? Insurance should never be embedded with any other Investment. It should be plain vanilla product because it will be costly to go for hybrid product. So never go for traditional/endowment/ULIP plans.
Now which company's term plan? You may go for any IRDA registered Insurance company keeping in mind the Claim Settlement ratio (most important), premium charges, coverage for longer period and flexibility of paying term.
The premium paid on term plan is also allowable as deduction under 80C of Income Tax. The Amount of Insurance should be kept at least 15 times of your annual income. It should be assessed at regular interval and should be increased to adjust according to your income. The premium charges are generally less if you go for term plan at early age. The lesser the diseases and vices, the lesser will be the premium. These two points saves lot of your money.
4. Mediclaim Insurance of whole family:
I would reiterate that you may think Mediclaim Insurance Plan is expenditure and not an Investment. But I would say there are certain expenditures which ultimately saves lot of money. Hence, they are actually an investment. So, KUCH EXPENDITURE ACCHE HOTE HAI.
Today, the life is too uncertain. We all face health issues often and the cost of medical treatment is shooting up every day. If we don't have mediclaim insurance, even a small medical treatment will give a big dent in our pocket. Medical treatment for any critical illness will be disastrous. If you have elder people in your family, you cannot avoid mediclaim insurance.
The early you enter, the more beneficial it will be. Reason being, the premium will be high for higher age. You should also assess the insurance amount at regular interval and should be increased to adjust according to your family size and age.
Now which company's term plan? You may go for any IRDA registered Insurance company keeping in mind the Claim Settlement ratio (most important), premium charges and other value added services like cashless settlement, coverage for all major illnesses, reimbursement of pre and post treatment expenditure, less capping for individual category of expenses, etc.
5. Mutual Fund Investment:
Till now, I have discussed every point by being pessimistic. But we can have different things in our investment portfolio by being little bit optimistic. Mutual Fund should come to our mind first when we talk of being optimistic. Here, the goal should be creation of wealth at long term. It may be specific to any life event like higher education of children, marriage of children, foreign trip, etc.
It is not a short term money making tool. Even direct investment in Equity market may lead to loss of hard earned money. Mutual funds are managed by highly professional fund managers and are subject to SEBI regulations. So, MUTUAL FUND SAHI HAI.
There can be one shot investment or SIP. SIP can be monthly, bimonthly, quarterly, half yearly or yearly. The options may vary depending upon the fund management company. But SIP is a good tool to save money in small tranches. If you have excess fund and no near future commitment, you may also go for one shot investment. Even Investment in ELSS funds is allowable as deduction under 80C of Income Tax.
There are two types of Mutual fund plans, namely Direct plan and Regular plan. There is broad category of funds like Large cap funds, Mid cap funds, Small cap funds, Mixture of small/mid/large funds, ELSS funds & debt funds. Debt funds are for people with high risk appetite. Hence, we are excluding them for discussion here.
Direct plans are for those who have some knowledge of equity and equity funds. One can invest in direct plans through the mutual fund investment companies or through intermediaries like PayTM Money and ETMoney. These intermediaries provide insight into the details of each plan like fund size, fund manager, expense ratio, historical returns, risk involved, holdings, etc. So it is easy to analyze, compare and make decision to invest. Moreover, they are quick and don't charge any commission.
If you are not familiar with equity investing, please go for Regular plans. Agents will make you aware about investing in Regular plans. They will charge commission for that not directly but indirectly by charging it from Mutual Fund Company. But it is strongly advisable if you are ignorant of investing in equity.
Gains on equity oriented mutual funds held for less than a year are treated as short-term capital gains and taxed at 15%. Gains on equity oriented mutual funds held for a year or more are treated as long-term capital gains and taxed at 10% for gains exceeding Rs 1 lakh in a year. Dividends from equity mutual funds are tax-free in the hands of investors but they are liable for a dividend distribution tax of 10% (11.648% with surcharge and cess).
6. Real Estate:
The Investment in Real Estate should be the last thing to think of Investment. The reason being, this is the most illiquid asset. If you have long term view for investing, then and then only you can think of this option.
Buying first residential property for family is attached to our emotions as Indian. We buy residential property even by taking a loan. It is ok to go for loan for first property which we occupy as our home. But buying another by taking loan is not advisable.
When you have spare money after investing in all the above mentioned options, you may go for investing in real estate. Investment in Real Estate can be divided into two category, residential property and commercial property. Investment in Commercial property is one of the most preferred real estate investments.
Rent income on let-out property and Gain on sale of Real Estate property both are taxable under Income Tax, subject to certain relaxations and allowable deductions.
Investment in Gold can be in the form of jewellery, bullions, coins, bonds, Gold ETF, etc. Gold was considered a universal currency for hundreds of years. Although it is no longer a primary form of currency, gold is still a solid, long-term investment and may be a valuable portfolio addition, particularly in a bear market.
We, being Indians, are sentimentally attached to this investment like no other. We are world's second biggest buyer of gold. And we don't sale the gold and accumulate it like anything. Hence, it becomes almost illiquid asset for us.
Gain on sale of physical gold/ETF is taxable under income tax under Capital gain. Deposit Certificates issued under Gold Monetization Scheme, 2015 are excluded from the definition of capital asset and, therefore, no capital gain shall arise in the hands of depositor at the time of redemption. Further, interest earned on such deposit is also exempt from tax under section 10(15) of the Income-Tax Act. The interest on the Gold Bonds is taxable as per the provisions of the Income-Tax Act, 1961. However, the capital gain arising on redemption of these bonds to an individual is not taxable as redemption value of such bonds is excluded from the definition of transfer. But such benefit is not available if the bonds are transferred from one person to another before the expiry of such bonds.