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Latest articles on Life Insurance, Non-life Insurance, Mutual Funds, Bonds, Small Saving Schemes and Personal Finance to help you make well-informed money decisions.
Your tax planning starts with the calculation of the total amount of money that you are already paying towards the financial instruments, which also qualifies for the tax deduction. So, lets say, if you are already paying around Rs 60,000 per year for such instruments, then you would be required to invest only another Rs 40,000 in qualified financial instruments in order to avail of the total Rs 1 lakh tax deduction.
One must be paying premiums for insurance policies and contributing to provident fund. By doing so, if Rs 1 lakh limit of tax deduction is already exhausted, one does not need to look at tax saving instruments and can invest in any instrument depending on their financial goals. But if the limit is not exhausted, one has to decide how much to invest in equity and debt.
Also, your asset allocation depends on your risk taking capacity. Generally, people of lower age group enjoy higher risk appetite than older people. Hence the equity allocation also changes with the changing age profile. "A person who is in the age bracket of 30-40 years must invest a minimum of 40% of the portfolio into equity, however, retired people should invest around 20-25% in equity. Having said that, one should consider investing in equity only if the investment horizon is at least three years,".
WHAT ARE THE AVAILABLE INSTRUMENTS?This is like any other equity mutual fund with tax benefits. One can either invest a lump-sum amount in these schemes or choose a systematic investment plan (SIP). SIP gives you the benefit of cost averaging by providing the facility of investing an equal sum of money in a scheme each month. "Current market conditions certainly give you the opportunity to buy more. Investing through ELSS would be a good option if the Rs 1 lakh limit of deduction is not exhausted,".
Public provident fund (PPF):In a PPF one can invest a minimum of Rs 500 to a maximum of Rs 70,000 in a year. Unlike other financial instruments, you are not required to pay an equal amount of money every year; hence depending on your need and availability of funds, you can change the investment amount every year. Also, PPF is an attractive instrument in the sense that it offers a return of 8% per annum on compounded basis, whereas, rate of return from other fixed income instruments may not remain high specially on the back of the fact that whole world is moving towards low interest rate regime.
Fixed deposit:It gives you tax benefit if you invest for more than five years. But the return from the fixed deposit is taxable. In the current market condition a PPF has an edge over fixed deposit because returns from PPF are not taxable. In both the cases, money gets blocked for five years. However, from fixed deposits, total money can be withdrawn but you can withdraw a part of the money from PPF.
Other instruments are post office saving instruments and debt mutual funds. But before putting money into any of these instruments, one must see the economic conditions. The economic conditions in the last year were different from this year hence your investment strategy should also differ from last year to maximise your wealth.
Seeing the current market condition one has to take a call on two things - degree of safety one wants to maintain and if the market picks up from here how one will be benefited. Taking into account both the aspects, one can invest up to Rs 70,000 in the PPF, which gives decent returns and for the remaining Rs 30,000 one may opt for SIP route to invest in the equity market. In the next year, one can again reshuffle the portfolio depending upon the prevailing economic conditions.
NO TENSION* Calculate the money already paid towards the financial instruments with tax benefits
* Chalk out a financial plan, depending on your estimated income for the financial year
* For those in 30-40 year age bracket, invest at least 40% in equity
* Invest in equity only if your investment horizon is three years
* By offering 8% interest, PPF remains an attractive, specially when whole world is moving towards low interest rate regime
* Given the market condition, one can invest Rs 70,000 in the PPF and remaining Rs 30,000 in equity through SIP route
* Reshuffle the portfolio depending upon the prevailing economic condition
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