Q1. I am a salaried individual. How can I maximise my take-home pay by making the appropriate investment declarations?
Being a salaried individual, you would have already received the investment declaration request form your employer. The last date for submission of that information is around the corner.
This is an important piece of paperwork to be completed at the beginning of every financial year. Do not make any mistake, because that can cost you throughout the year. Your monthly take-home salary will depend on what you declare.
The tax that gets deducted from your salary at source (TDS) is computed based on the tax-deductible investments you plan to make during the fiscal year. This declaration is made to give your employer a fair estimate of your annual earnings and savings plan. Accordingly, your yearly tax liability is calculated.
Employees often take this casually and do not make correct declarations. They may declare overambitious tax saving plans and then end up making huge tax payments (as TDS) at the end of the year when they are unable to produce proof of the declared investments. Or they may declare less than what they can and plan to, ending up with high TDS, reduced take-home pay and a long wait for a year to get tax refunds.
As financial advisors, we urge you to always declare the right amount. This will require some careful planning and calculation. This is what you can do:
Calculate your total annual income
This is easier for those whose only income is from salary from one employer. However, many have significant income from other sources as well—rent, payment for freelance work, etc. Do not forget to include your income from such sources. If you are expecting a hike in salary, take into account the increased figure in your calculation. This is important as everything will ultimately add to your total tax liability. You may choose not to add income from which TDS is automatically deducted, like interest income.
Get to the taxable income
Now that you have arrived at your gross annual income, start subtracting deductions like your EPF contributions, HRA (if you stay in a rented accommodation), reimbursements and perquisites such as leave travel allowance, medical expenses, conveyance, and telephone charges from your gross income. You are left with your taxable income.
Now, bring in the tax-saving investments you have been making regularly and will continue this year as well. This could include your PPF contribution, fee paid for children's education, premium towards insurance policies, home loan payment, ELSS SIPs, etc. All these investments would form a part of your declaration form too. The number you now reach is the income you must pay tax on.
Section 80C and beyond
Most of the investments mentioned above will fall under Section 80C and could quickly add up to the ₹1,50,000/- limit available under that section. However, you may still need to make some investments to get out of the tax net. Consider the additional ₹50,000/- deduction available under the Section 80CCD (1b) for contributions towards the NPS scheme.
Up to ₹5,000 spent on preventive health checks, and medical expenses up to ₹50,000 incurred for uninsured parents above 60 years, are also eligible for deduction under Section 80D.
If you are doing all this, you have begun well. However, there are more options that can be explored to minimise your tax liability and maximise your take-home pay. Get in touch with your financial advisor to help you plan your investment to minimise tax and maximise returns.
What is term life insurance? What are its benefits?
Term life insurance guarantees payment of a stated death benefit to the beneficiaries if the insured person dies during the term specified in the policy. When you have a term life insurance policy, you pay a monthly premium for a defined term (typically between 10 and 30 years). If you die during that time, a cash benefit is paid to your family or others named as beneficiaries under the plan.
A term life policy offers multiple benefits.
Term life insurance is the purest form of life insurance. It pays your beneficiaries if you pass away prematurely – that’s it. It doesn’t come with an investment component and is easy to manage. As long as you pay the premiums regularly, you are covered for the duration of the policy. When the term of the policy ends, you either must buy a new policy or go without insurance cover.
As term life insurance only gives protection for a certain number of years, it will be less expensive than a whole life plan. Your premiums will be lower because if nothing happens to you during the set term, your policy will expire, and the insurance company will never have to pay out the benefits. Whole life policies pay out no matter when you move on, so those premiums are higher.
With term life insurance, you get to choose the term length and coverage amount. You can also buy multiple, separate term life policies to cover different goals. For example, you may have a 30-year policy for your growing family, but only a 10-year policy to protect a business investment. You need to pay a surrender charge when you terminate a whole life plan, but this does not apply to term life plans.
Once you enter into an agreement with the insurance company and purchase a term policy, your premiums cannot be raised due to illness or other life circumstances. The premium amount is guaranteed to remain the same throughout the life of the policy.
Life can be stressful financially when families are just starting out. Term life insurance gives young families the assurance that what matters most to them will be protected at a cost they can afford. They do not have to make a financial decision that will bind them for a lifetime. The term policy will last till term provided the annual premiums are paid. When the life circumstances change, they can take a fresh guard—perhaps opt for an additional policy.
There are different types of term plans available. It is important to assess your current life goals before you choose the policy that is the best match for you. Your financial advisor will be your best guide in making this selection.
Q2. I have been investing regularly as per my financial goals. I want to know whether it is still important for me to pay attention to tax planning.
Tax planning involves planning your financial activities in such a way that you derive maximum tax benefit by using all relevant provisions in the tax laws. You tap every exemption, deduction, rebate, and relief, to minimise your tax liability. Please note this is legitimate and should not be confused with illegal and unethical tax avoidance.
Reduce tax liability
The primary objective of tax planning is to reduce one’s tax liability by understanding and making legitimate use of the provisions of the tax laws. This leaves the beneficiary with a larger part of the earnings after tax.
As proper tax planning complies with the provisions of the law, it eliminates or at least minimises the possibility of any dispute or litigation related to tax compliance.
Tax planning is a measure of one’s knowledge of tax laws. Money released by proper tax planning can boost one’s investments.
Do your bit for the nation
Like each one of us, the nation too needs to earn and save to grow and prosper. Diligent taxpayers like you make that possible. The very avenues of productive investments you choose to save tax enable the economy to prosper. When the economy prospers all of us prosper including those who do not earn enough to pay tax. In other words, the effort you put into planning and paying your tax contributes not only to your growth but also to the economic stability of the whole nation.
Q3. My friends tell me that prepaying a home loan will help me save more. Is that true? If so, what do I need to consider before I prepay?
Many of us need a home loan at some stage in life. Once you take care of the documentation and fulfil the requirements of the lender, it is easy to get a home loan. Repaying it over months and years is a different matter altogether.
You may repay the loan in two ways. Keep paying the equated monthly instalment (EMI), that includes the interest and principal components, right through tenure of the loan.
Or, when you have sufficient money to spare after meeting your needs and providing for emergencies, prepay the loan. This is the option about which you are now thinking.
Let us discuss what you must keep in mind before you prepay your home loan.
When you prepay, you are denying the lender a part of the income they would have otherwise earned as interest during the rest of the tenure. So, some lenders specify a prepayment charge when you avail of the loan. Also, if you have taken the loan based on a floating rate of interest (as against a fixed amount), you are unlikely to have to pay prepayment charges.
Make sure you are clear about this when you take the loan. Remember to include the prepayment charges when you calculate the total outgo when you decide to prepay. How does that total compare with the total you would have otherwise paid over the tenure of the loan?
Prepay or invest?
You have decided to prepay because you have enough money left over after meeting your expenses and emergency provisions. Consider your potential return if you were to invest this excess amount. If that investment is likely to yield a return more than what you would gain by prepaying, opt for the investment, and let the loan continue. If prepayment is more profitable, go for it.
Assess market conditions
If the prevailing economic conditions and predicted trends indicate a rise in the interest rates, you may want to get rid of the loan burden immediately. On the other hand, if the conditions are buoyant, you may get a better yield by investing the surplus and letting the loan continue. Seek the advice of a seasoned financial advisor before you take the call.
You must consider prepayment only if you have sufficient surplus funds or there is an enduring increase in your income. Else, the prepayment can put you under financial stress for a long time.
Ascertain the impact of prepayment on your tax liability. Will the tax exemption available on the interest component of the loan work in your favour over the long term? If yes, do not prepay.
So, there are many factors you must consider before you take the decision to prepay your home loan. It is easy to get emotional about this and make an unwise choice. Let your financial advisor help you make an objective decision based on your financial circumstances and life goals.
Q4. I am the father of two financially independent children. I have a diversified portfolio, largely equities—stocks and mutual funds. How should I plan for my retirement now?
Retirement marks the beginning of a new journey, something to look forward to and worth preparing for. This is the right stage for you to pause and take stock.
Both your children are financially independent. You have already taken care of the financial well-being of your family by making investments in different asset classes. However, it is important to remember that your needs and goals do not retire when you do. You will still need to generate sufficient income from your portfolio to maintain your lifestyle, without exposing yourself to additional risks.
This is the right time to engage a financial advisor to professionally review your portfolio. The advisor will first learn about your post-retirement goals and rework your portfolio to eliminate risk and to minimise your tax burden. At this stage, it is best to rebuild your portfolio by opting for a more balanced mix of fixed-income and market-linked investments.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.