The following, in our experience, is a list of ten key aspects largely neglected by most investors. Please examine how many of these are known-knowns, known-unknowns or better still unknown-unknowns!
PPF — A sine qua non
Every Indian should have a PPF account ticking for them. Invest as much as you can up to the maximum limit of Rs. 1,50,000 per annum. Remember, Rs. 1,50,000 can be invested in each account separately. Invest at the beginning of the year. Do not shy away from PPF under the mistaken notion that funds are locked up for 16 long years. Yes, the term of PPF is 16 years but the average lock-in is just six years. However, do not use the premature withdrawal facility, unless there is an emergency.
Avoid other general Post Office investments including National Savings Certificates (NSCs)
There are many investors who buy NSCs under the mistaken notion that it is advantageous to do so because of —
a) Its 6-year term against that of 16 years of PPF.
b) The interest for 1st 5 years of the 6-year term of NSC attracts tax deduction but the interest of PPF is devoid of the same.
c) Loans from the banks are available against NSCs.
It is wrong to opt for NSC and not PPF. Firstly, PPF interest is tax-free without any limit whereas, NSC interest is fully taxable. Secondly, the interest paid on the loan taken against NSCs cannot be setoff against any income.
Arrangement between you & your spouse
Agreed, husband and wife have one mind and one soul. But not for income tax. It is crucial to have separate joint accounts, one for husband and wife and the other for wife and husband, even if one of them is not assessed to tax. Payment of EMIs, credit card bills and even investments etc., should be from the account of the person who is the first holder of the account and who is actually liable to pay for the expense or investment. Ditto for receipts of income. This will help tremendously, especially while filing your tax return in the new ITR form which requires individual disclosures of high value transactions.
Buying a House
We find that very often, property is bought in the name of his wife by the husband using his own funds. Do not buy any housing property, residential or otherwise, in the name of the spouse with your funds. Do not do so even if you already possess a house. This creates insurmountable difficulties later on, especially when the house is to be sold.
Housing Finance
In fact, even if you have the wherewithal to purchase your own house, it is better to opt for housing finance. Tax breaks are available only on borrowed funds and not on the use of owner’s funds. Moreover, in most cases, you will find that the direct cost of borrowing is much lesser than the tax saved. Real estate can be co-owned. Buy the property with both husband and wife having a defined share. The loan should also be taken and the interest and principal payments for the same should be made separately by each from their respective bank accounts.
If the above is carried out, each is entitled to an interest deduction of up to Rs. 2 lakh under Sec. 24 and a principal deduction of Rs. 1.50 lakh under Sec. 80C. So totally between the both of you, up to Rs. 5 lakh of income will escape tax! Of course, if you are taking advantage of the tax shelter of Sec. 80C here, then contribute only the minimum Rs. 500 to PPF.
Life Insurance
Do not buy life insurance only because it forces compulsory savings or it saves taxes. Do not buy insurance for your child. The child’s demise, howsoever devastating on your emotional health, would make no difference to your financial status. If you are so inclined, make investments in the name of the child such that by the time he/she becomes a major the funds would come in handy for needs such as marriage, further education, setting up of a business etc.
If you do need a life cover, go in for low-premium, high risk-cover policy such as term insurance. In general avoid high cost endowment and ULIPs.
Mediclaim
There is a tax break of Rs. 20,000 available, but that is not the point. Mediclaim is for the good of you and your family members — the tax cut is just an added benefit.
Avoid NFOs but invest in equity mutual funds which have a track record
It is next to impossible to build wealth without equity exposure. Note that we use the word “wealth” and not capital. Wealth is when your capital brings a smile to your face. Saving a part of your salary in bonds or FDs is not going to do that. Equity schemes offer :
a) Freedom from tax on dividends in the hands of the investor.
b) No dividend distribution tax required to be paid by the MFs.
c) Freedom from long-term capital gains tax.
d) Short-term capital gains taxed at the concessional rate of 15%.
e) Excellent liquidity.
Do not invest in equity directly
The only way to double your money quickly is to fold it into two. Otherwise, invest with a quality mutual fund, regularly, as much as you can, whenever you can.
Budget your spends
Last but not the least, budget your monthly expenses and make your investments at the beginning of the month, each month, month in month out. This way, there is no way that you can overspend and defer savings to the next month.
To conclude
These small things have a way of adding up and sometimes make all the difference between financial health or the lack of it.
(The authors may be contacted at wonderlandconsultants@yahoo.com)
